Can I Discharge Tax Debts Owed to the Internal Revenue Service in My Bankruptcy?

IRSA recent Chapter 7 case allowed my client to discharge more than $17,000 in taxes owed to the Internal Revenue Service.  While the normal rule is that tax debts are among the “exceptions” to bankruptcy discharge found in the bankruptcy code (11 U.S.C. 523), tax debts can discharged assuming certain rules are met.  The application of these rules can be tricky, so make sure that your bankruptcy attorney is experienced in applying them.  All of the rules must be satisfied, independent of each other. 

Here is a quick summary of the basic rules of discharging income tax debt”

  1. The “three year rule.”  This means that the due date for the tax return must be more than three years from the date you file your bankruptcy.  Watch out here, taxes are not always due to be filed on “April 15” of any given year.  If April 15 falls on a Sunday, April 16 may be the filing date.  If it falls on a Saturday, then April 17 may be filing date.  To make matters even worse, there are occasional Mondays which are recognized as “Emancipation Day.”  This is an official holiday in the District of Columbia, where the IRS is located.  In this instance, the filing date is the following Tuesday.  If the taxpayer files for an extension of the due date, this can also extend the due date.

 

  1. The “two year rule.” This means that the tax returns must have been filed with the IRS more than two years before you file your bankruptcy.  No filing past due taxes on one day, then filing your bankruptcy the next day.  But don’t confuse this with the three year rule.

 

  1. The “240 day” rule. Not eight months, you have to count 240 actual days.  This timing rule refers to the day on which the Internal Revenue Service “assesses” the tax.  Or, basically, the day on which the IRS puts the debt on its books as being due.  You can’t file your bankruptcy until 240 days has run since the date the tax debt was assessed.

 

  1. The tax return must be “non fraudulent.”

 

  1. The tax return must not have been filed with the intent to willfully evade of defeat the tax. A “substitute for return” does not qualify as a return.  Watch out for these.  A “substitute for return” is something the IRS may file on your behalf, if you default and don’t file your tax returns on time.

If you think you meet these basic rules, consult with a bankruptcy attorney.  Your attorney will need your permission to obtain a “tax transcript” for the tax years in question.  You can find the authorization here, its formal name is IRS Form 8821. Your attorney will fax in the authorization, then the transcript will be faxed to your attorney.

The tax transcripts have number codes put there by the IRS.  Understanding the meaning of these codes, and the dates associated with these codes, is critical.  But if you meet the rules, your tax debt can be discharged just like medical bills and credit card balances.

Blake Brewer is an Ohio attorney who, among other legal services, helps consumers with tax issues in bankruptcy filings.  While reading this summary does not create an attorney client relationship, you can contact him by email at blake@blakebrewerlaw.com or call him at 216-642-8234 to schedule an appoint

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