When Delaying Bankruptcy May Help Discharge Tax Debt

Delaying your bankruptcy filing can help you discharge older income tax debts.

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If you owe federal or state income taxes, you may be able to discharge them in Chapter 7 bankruptcy or Chapter 13 bankruptcy if they are sufficiently old enough. Read on to learn more about how delaying your bankruptcy can help you discharge older income tax debts.

When Can You Discharge Income Tax Obligations?

In most cases, your tax obligations receive special priority treatment in bankruptcy and can’t be discharged. However, bankruptcy law allows you to discharge your federal or state income tax debts if you satisfy all of the following requirements:

  • The tax return was due at least three years prior to your bankruptcy. You are not allowed to discharge recent tax obligations in bankruptcy. However, you may be able to discharge your liability on taxes for which a tax return was due at least three years before the date of your bankruptcy filing (if you received an extension, the effective date is the new due date under the extension).
  • You filed your tax return at least two years before your bankruptcy. In order to discharge an income tax obligation, you must have actually filed a tax return for that debt at least two years prior to your bankruptcy filing date.
  • The tax assessment must be at least 240 days old. To be dischargeable, the income tax must have been assessed at least 240 days prior to your bankruptcy, or not yet assessed at all. Be aware that this limit may be extended if you submitted an offer in compromise or filed a previous bankruptcy.
  • The tax return was not fraudulent and you did not engage in willful tax evasion. If you committed tax fraud or willfully tried to evade paying taxes, your taxes will not be discharged in bankruptcy.

To learn more about what happens to tax debts in bankruptcy, see Tax Debts in Chapter 13 Bankruptcy andTax Debts in Chapter 7 Bankruptcy.

Bankruptcy Does Not Eliminate Tax Liens

If a tax lien was recorded against your property prior to bankruptcy, then your discharge will not eliminate that lien. Your discharge only wipes out your personal obligation to pay the debt. This means that if you sold the property, you would still have to satisfy the tax lien from the proceeds.

Delaying Your Bankruptcy May Help Discharge Your Income Tax Liability

Many of the requirements you must satisfy before being allowed to discharge your income tax debts involve timing restrictions. As a result, if you have older tax obligations, you may be able to wipe them out simply by delaying your bankruptcy long enough to fulfill those requirements. However, since the rules on discharging taxes can be extremely complex, consider talking to an experienced bankruptcy attorney before filing your case to make sure your tax liability can be discharged.

Example. Janet wants to discharge her federal income tax liability from 2007. She filed a timely tax return on March 15, 2008 (her tax return for 2007 was due on April 15, 2008). It is now March 16, 2011. Even though it has been three years since she filed her return, if Janet files for bankruptcy now, she will not be able to discharge her tax liability. This is because the effective date when calculating the age of her tax debt is when the tax return was due (April 15, 2008). As a result, assuming she meets the other requirements, Janet can discharge her tax debt if she waits to file her bankruptcy on or after April 16, 2011.

To learn about other situations when delaying your bankruptcy filing might be beneficial, see Timing Your Bankruptcy Filing.

by: , Attorney

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