Income Taxes Discharged and Not Discharged in Bankruptcy
Bankruptcy DOES discharge–permanently write off–certain income taxes. It’s mostly just a matter of time.
Taxes Can Be Discharged (Legally Written Off)
Some special kinds of debts can never be discharged through bankruptcy. Examples are child and spousal support, and criminal fines and restitution. A bankruptcy filing does not write off these kinds of debts.
Income taxes are not like these. Almost all income taxes can be discharged, once a few conditions have been met.
Once the tax you owe meets those conditions, it is discharged exactly like any other debt. The IRS and your state taxing authority are no different than your credit card creditor. Once a tax debt is discharged, they can never chase you for that debt again.
The Two Main Conditions to Discharge Income Taxes
For most people the conditions are not complicated. They require filing your tax returns and waiting out a certain amount of time.
To discharge an income tax in bankruptcy, BOTH:
- More than 2 years must have passed between the date that you submitted the pertinent tax return to the IRS or state tax agency and the date you file your bankruptcy case.
- More than 3 years must have passed between the legal due date for that tax return and the date you file your bankruptcy case.
That’s usually all it takes: filing the tax return and waiting for these two-year and three-year deadlines to pass before filing bankruptcy.
A Few Cautions
Keep three practical considerations in mind about these two time periods:
- The 3-year period starts to run when the tax return was “last due, including extensions.” So if you asked for (and got) an extension of time to send in the tax return—from April 15 to October 15, usually—the three-year period does not begin until the extended due date for filing the tax.
- You need to be precise about the actual date the tax return was due for the tax year in question. For example, this year April 15 falls on a Friday but that’s also a holiday in Washington D.C., so tax returns are not actually due until Monday, April 18. A couple days may seem minor but can make all the difference between a tax debt being completely discharged and being still fully owed.
- With the 2-years-since-tax-returns-filed condition, be sure to determine accurately whether and when the IRS/state actually received your tax returns. Unless you already have documented proof of that date, get that directly from the IRS/state to make sure.
Two Other Conditions that Seldom Apply
Most of the time, your tax debt is discharged if those two conditions are met. But there are two conditions that could possibly come into play for some people.
- More than 240 days must have passed between the date that the tax was assessed by the IRS/state and the date you file your bankruptcy case. This is seldom an issue because assessment usually happens within a few weeks after you get your tax returns in to the IRS/state. So you automatically meet this 240-day condition when you meet the 2-year and 3-year ones. It only comes into play when assessment gets delayed with a tax audit, litigation in Tax Court, a tax appeal, offer in compromise, and similar complications.
- If you file a fraudulent tax return or intentionally evade a tax, it cannot be discharged in bankruptcy. This is relatively rare. It arises only if you were materially dishonest on your tax return, by not including some of your income, or by intentionally claiming deductions or credits which you knew you were not entitled to, or by cheating the IRS/state in some other way.
Assuming that these last two conditions don’t apply to you, and you filed your tax return for the tax in question, that tax can be discharged once the 2-year and 3-year periods have expired.
For example, assume you owe $7,500 for 2012 income taxes, for which you submitted your tax return for that tax on the regular due date of April 15, 2013. Assume the tax was assessed as usual way back in 2013, and there’s no tax fraud involved. You met the 2-year condition as of April 16, 2015. You meet the 3-year condition by filing your bankruptcy case on or after April 16, 2016. That bankruptcy case would discharge the $7,500 income tax debt and it would be permanently out of your life.