Everyone knows that you can’t discharge income taxes in bankruptcy. Right? No, not right at all. This misconception about bankruptcy law illustrates just why you shouldn’t substitute cocktail party gossip for the advice of a good lawyer. Especially when the question involves discharging income taxes in a consumer bankruptcy case.
Generally, income taxes are discharged in chapter 7 or chapter 13 bankruptcy case when the tax is four years old or more.
First, the tax must be owed for a year where three years have passed since the tax return was due. Most of the time, the return was due on April 15.
Second, the return must have been filed more than two years ago. Obviously, this rule applies only to late filers.
Third, the tax must not have been assessed with the last 240 days. This rule applies where the return didn’t accurately show all the tax that was owed, and the IRS just finished assessing additional taxes after discovering your mistake.
Fourth, if you willfully attempted to evade or defeat payment, it can’t be discharged. Courts have ruled that simple non-payment, without anything more, is not enough to show that you tried to evade or defeat payment of the tax.
Sections 523 and 507 of the bankruptcy code do impose some additional requirements, but what has been written above is enough for most people to know. If you filed your tax return on time, and if the return was accurate, and if it’s been more than three years since the return was due at the latest (usually April 15 of a given year), then your taxes are going to be discharged if you file for bankruptcy, unless a specific exception in the law applies to you. It’s that simple.
If you owe income tax that you can’t pay, here is what you now know you should do: first, try to avoid listening to legal advice about bankruptcy from well-meaning friends at cocktail parties, and second, get yourself to a bankruptcy lawyer to find out for sure if your income taxes are dischargeable in bankruptcy.
Carolyn Secor is a Clearwater bankruptcy attorney and Clearwater foreclosure attorney serving Palm Harbor, New Port Richey, Oldsmar, Tarpon Springs, Seminole, St. Petersburg, and the Tampa Bay area.