Discharging Tax Debt in Bankruptcy

Benjamin Franklin once said that nothing in this world is certain except death and taxes. If necessary, however, there is an escape from certain taxes.

Despite the common misconception, some taxes can be discharged in bankruptcy. Under 11 U.S. Code 505, bankruptcy courts have jurisdiction to decide tax disputes, including tax penalties. This applies to Chapter 7, Chapter 11, and Chapter 13 bankruptcy filers.

Here are the conditions – all of which must be met – to absolve yourself of your federal and/or state income tax obligations.

It must be an old tax debt (“The 3-2-240 Rules”)

You can’t discharge a recent tax debt in bankruptcy, but an “old and cold” one is fair game. It must, however, pass the “3-2-240 Rules”, which means that:

  1. The tax debt must have been originally due at least three years before the date that you filed for bankruptcy ( 11 U.S. Code §507(a)(8)(A)(i) ),
  2. The tax return for the debt must have been filed at least two years before the date that you filed for bankruptcy ( 11 U.S. Code §523(a)(1)(b)(ii) ), AND
  3. The tax debt must have been assessed at least 240 days before the date that you filed for bankruptcy, or the debt must not yet have been assessed ( 11 U.S. Code §507(a)(8)(A)(ii) ). The date of assessment is usually the date you filed your tax return, unless the IRS disagreed on the amount due.

Your tax return must have been timely filed

The two-year rule mandates that your tax return be timely filed (on the original due date or date of filing extension). Discharge of taxes in bankruptcy may or may not be available if you filed your tax return late.

No discharge if fraudulent tax return or tax evasion

There is no reward for attempts to avoid taxes – if you filed a fraudulent tax return or otherwise tried to commit tax evasion in the past, discharge of the tax debt in bankruptcy is unavailable to you.

No discharge of federal tax liens

Although bankruptcy may discharge your tax debt, it generally has no effect on federal tax liens. Unless the court determines that the tax lien is invalid, if the IRS has recorded one on your property you will need to pay it before any sale can be completed.

Full service California tax firm

The attorneys and accountants at Moskowitz, LLP have worked with numerous bankruptcy attorneys in helping their clients discharge their tax debt. We can also litigate any tax dispute, regardless of the venue.

Disclaimer: Given the complexity of tax and bankruptcy it is important that you consult with tax and bankruptcy attorneys before you file for bankruptcy as your rights may be affected. The decision to file bankruptcy should not be taken lightly.

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