Will Bankruptcy Help With Tax Debts?
In some cases, bankruptcy can eliminate back taxes owed to the IRS as well as to state governments, however the devil is in the details. It is certainly not easy to eliminate tax debts in bankruptcy court. If your taxes don’t qualify for discharge and you file for bankruptcy, the IRS will be waiting for you on the other side with additional time to collect your taxes. Under normal circumstances, the IRS has ten years to collect tax bills, penalties and interest from you. Filing bankruptcy temporarily freezes IRS collection efforts, but the IRS then tacks on the 4-5 months bankruptcy period plus 180 days to their collection window. In essence, a bankruptcy filing that doesn’t discharge tax debts will give the IRS close to an extra year to chase you for back taxes.
So when can back taxes be wiped clean by a bankruptcy filing? There are three basic timing rules that apply:
Rule #1: The Three Year Rule
Your tax debts must be three years old from the date they were due. Note that this does not mean from the date you filed. Every year, tax returns are due for most Americans on April 15th. This means that your 2004 taxes are not eligible for discharge until April 15th of 2008. This is the case because your 04′ taxes weren’t technically due until April of 05′ and you calculate the three year period from that point forward.
Rule #2: Your Tax Returns Must Have Been Filed for Two Years Before Bankruptcy
This is where the IRS really puts the debtor between a rock and a hard place. The government knows all too well that many who have fallen behind on their tax bill have also failed to file tax returns. Requiring that the actual returns be filed for two years prior to the bankruptcy prevents seriously delinquent taxpayers from filing late returns one day and bankruptcy the next.
Rule #3: the Tax Must Have Been Assessed More Than 240 Days Ago
This will likely be the easiest requirement to satisfy and essentially requires that the IRS or state taxing authority has formally determined that you owe the taxes you’re trying to get rid of in bankruptcy more than 240 days before you file paperwork with the court. Note that an offer in compromise will delay the 240 day rule while it is pending plus an additional 30 days.
What About Tax Liens?
A tax lien is a public filing that the IRS uses to put the world on notice that you owe them money. Filing for chapter 7 bankruptcy will only eliminate your personal obligation for tax debts, not tax liens that have attached to your property. Any lien recorded prior to your bankruptcy case will survive the filing.
Rob Cohen, the Managing Partner of Cohen & Cohen P.C., is a bankruptcy attorney that practices in Colorado and Wyoming. He serves as a Chapter 7 Bankruptcy Panel Trustee, and has to date administered over 8,000 Chapter 7 bankruptcy estates. Rob is a Certified Consumer Bankruptcy Specialist, and was nominated for Denver Business Journal’s 40 under 40 in both 2014 and 2016.