Bankruptcy & Income Tax Debt

Austin, Texas, Board Certified Bankruptcy Lawyer

Income taxes can be discharged in bankruptcy if each of the following three conditions are met:

Condition 1: Three years must have elapsed since the income tax return was due

More than three years must have elapsed between the date the income tax return was due, including extensions, and the date your bankruptcy petition is filed. The three-year time period does not expire until the due date for filing the tax return.

For federal income taxes, if no extension is requested, the three-year time period will elapse on April 15 of the 3rd year following the tax year in question. If an automatic extension is requested, the 3 year time period will not expire until the last date of the extension period (usually August 15 or October 15). The last due date for filing the return is the proper date for determining if the 3 year age rule has been satisfied. The date the taxpayer actually files the return is irrelevant.

Condition 2: You must have filed the income tax return within two years

You must have filed the income tax return more than two years before the date your bankruptcy case is filed. You must file the tax return to meet this condition. The Internal Revenue Code authorizes the Internal Revenue Service (IRS) to file a substitute return for a taxpayer if he fails to prepare and file the return. If IRS prepares a return for the taxpayer, the taxpayer can consent to the return by signing it, or the IRS can file the return without the taxpayer’s consent. If you do not sign or otherwise agree to an IRS filed return, the IRS return does not count as a filed tax return for purposes of the two-year filing rule. However, if you sign the return, the IRS return will count as a filed return for purposes of the two-year filing rule.

Federal tax returns filed before the due date are not considered filed until the due date. Returns filed after the due date are considered filed on the date IRS actually receives the return. If the taxpayer files the return before the due date, the two-year time period starts to run on the tax return due date, not the actual filing date. If the taxpayer files the return late (after the last due date), the two-year time period starts to run on the date that IRS actually receives the return.

Condition 3: The taxing authority must have assessed the tax more than 240 days before the bankruptcy petition is filed

The taxing authority must have assessed the tax more than 240 days before the bankruptcy petition is filed, plus any time an Offer in Compromise is pending, plus 30 days. Income taxes are usually assessed at the time the tax return is filed so the 240 day rule only applies in situations where there has been an additional assessment made as a result of an audit.

These Time Periods May Be Suspended

The three-year time period discussed above is suspended for the duration of all bankruptcy cases filed before the expiration of the three-year time period.

The 240 day time period is suspended for: (1) the duration of any time during which an offer in compromise with respect to that tax was pending or in effect during that 240 day period, plus 30 days; (2) the duration of any time during which a stay of proceedings against collections was in effect in a prior bankruptcy case during that 240 day period, plus 90 days; (3) the duration of any time during which a government unit is prohibited under applicable non-bankruptcy law from collecting a tax as a result of a request by the debtor for a hearing and an appeal of any collection action taken or proposed against the debtor; and (4) the duration of any time during which a stay of proceedings was in effect in a prior bankruptcy case or during which collection was precluded by the existence of one or more confirmed bankruptcy reorganization plans, plus 90 days.

An offer in compromise is an alternative method of settling a tax debt by offering to pay IRS less than the full amount due. The submission of an offer in compromise will suspend the running of (stop the clock on) the 240 assessment time period. If the taxpayer makes an offer in compromise within 240 days of filing for bankruptcy, the 240 day time period will be suspended for the time during which the offer in compromise is pending, plus an additional 30 days.

A taxpayer has the option of preventing IRS from assessing additional tax by filing a lawsuit in Tax Court to contest a proposed assessment. The filing of such a lawsuit will prevent IRS from assessing the additional tax until after the Tax Court resolves the matter. If the taxpayer files such a lawsuit and losses, the 240 day time period will not start until IRS assesses the additional tax, which can only occur after the lawsuit is over.

Free Consultation: Contact Board Certified bankruptcy attorney Fred E. Walker in Austin, Texas, for a debt relief consultation. There is no cost or obligation.