Robert and Rachel have fallen on hard times the last few years. Robert had back surgery two years ago and his once profitable landscaping business has failed due to the time he had to take off to recover from the back surgery. Rachel’s employer has recently stopped her mandatory overtime and she fears her job position may be eliminated at some point in the future as well. Notwithstanding these hardships, Robert and Rachel have substantial tax debt from the past years and while they have a repayment plan set up with the IRS, they haven’t been able to pay the last few months and now Sam the IRS Taxman has started to hound them to make a payment. Robert has been looking into options to find financial relief and recently read that he and Rachel may be able to discharge some of their tax debt by filing bankruptcy. Can Robert and Rachel discharge their tax debt by filing bankruptcy?
There is not an absolute “yes” or “no” answer to whether Robert and Rachel can discharge all their tax debt by filing bankruptcy. A Chapter 7 filing provides for a full discharge of allowable tax debts. A Chapter 13 filing provides a payment plan to repay some tax debts, with the remainder of debts discharged upon completion of either a three or five-year repayment plan. Under the new bankruptcy laws enacted in 2005, tax debts are treated the same way in both Chapter 7 and Chapter 13 bankruptcy filings. Robert and Rachel’s old tax debt will only be discharged by filing bankruptcy if their tax debt meets the following five criteria.
Five Rules to Determine Tax Debt Dischargeability in Bankruptcy
If Robert and Rachel’s income tax debt meets all five of these rules, then filing a Chapter 7 or Chapter 13 bankruptcy may be a good option to give them the relief they need to get a fresh start on their finances.
- The due date for filing a tax return is at least three years ago.
- The tax return was filed at least two years ago.
- The tax assessment is at least 240 days old.
- The tax return was not fraudulent.
- The taxpayer is not guilty of tax evasion.
Rule 1: Income Tax Return Must Have Been Due At Least Three Years Ago
- Rule 1: Income Tax Return Must Have Been Due At Least Three Years Ago
- Rule 2: Income Tax Return Must Be Filed At Least Two Years Ago
- Rule 3: IRS Income Tax Assessment Must Be At Least 240 Days Old
- Rule 4: Income Tax Return Cannot Be Fraudulent or Frivolous
- Rule 5: Taxpayer Cannot Be Guilty of Tax Evasion
- Other Rules That May Not Allow For Discharge of Old Tax Debt
- Other Tax Issues in Bankruptcy
Robert and Rachel’s tax debt must be related to a tax return that was due at least three years before they file for bankruptcy. The due date includes any extensions.
Rule 2: Income Tax Return Must Be Filed At Least Two Years Ago
Robert and Rachel’s income tax debt must be related to an income tax return that was filed at least two years before they file for bankruptcy. The time is measured from the date Robert and Rachel actually filed the return.
Rule 3: IRS Income Tax Assessment Must Be At Least 240 Days Old
The IRS must assess have assessed Robert and Rachel’s tax debt at least 240 days (8 months) before they file for bankruptcy. The IRS assessment may arise from a self-reported balance due, an IRS final determination in an audit or an IRS proposed assessment which has become final.
Rule 4: Income Tax Return Cannot Be Fraudulent or Frivolous
Robert and Rachel’s IRS income tax returns cannot be fraudulent or frivolous.
Rule 5: Taxpayer Cannot Be Guilty of Tax Evasion
Robert and Rachel cannot be guilty of any intentional act of evading the tax laws.
Other Rules That May Not Allow For Discharge of Old Tax Debt
Tax debts that arise from unfiled tax returns are not dischargeable. The IRS routinely assesses tax on unfiled returns. These tax liabilities cannot be discharged unless the taxpayer files a tax return for the year in question.
Other Tax Issues in Bankruptcy
All federal and state tax returns should be filed before the filing of Chapter 7 or Chapter 13 bankruptcy petition, in order to be prepared for the bankruptcy proceedings and ensure a smooth process. The bankruptcy trustee appointed to your bankruptcy case will also require you to provide copies of your two most recent income tax returns. Creditors may also request a copy of the income tax returns.
As one can see, Robert and Rachel’s questions regarding tax debt are not so easily answered. There are certain steps beyond the five rules discussed in this article that should be taken to ensure the successful dischargeability of qualifying tax debt in Chapter 7 or Chapter 13 bankruptcy filing. To find out what your options may be when considering filing bankruptcy, contact a bankruptcy attorney who will be able to properly address your questions and concerns.