Including Income Taxes in Bankruptcy

taxes in bankruptcy Wrong, income taxes must be included in bankruptcy regardless of whether they’re capable of being eliminated. Because all debts and assets must be disclosed when you file for bankruptcy, back taxes are a debt owing and are automatically included upon the filing of the bankruptcy petition. They are “included” when you disclose them to your attorney and ultimately the court.

So, the next question would be that although the taxes are included in the bankruptcy, they are not discharged, or wiped out, right? Well, maybe yes or maybe no.

Rules on Getting Rid of Tax Debt in Bankruptcy

In certain limited circumstances, IRS and State back taxes can be discharged or compromised in bankruptcy. First, 3 years must have gone by from the date the return was last due to be filed. Not when it was filed, but last due to be filed. And, last due to be filed, would take into account any request for extension of time to file a tax return for any particular year.

Second, 2 years must have gone by from the date the return was actually filed. This date would be the date the IRS says it received the return and posted it on their records, not when you mailed the return. Also, it must be your return you filed, not a substitute return filed by the IRS.

Third, 240 days must have gone by from the date of any or later assessment. Assessment usually happens when the return is filed, but can also happen when an amended return is filed, a 1099 is filed, an audit happens, or other subsequent tax event. IF you satisfy all 3 rules, then you might consider filing a bankruptcy to see about discharge or compromise of the tax debt owing for each year owing.

Exceptions to the Rule

Exceptions to these rules abound, and the most common is a tax lien of record, which may secure the tax debt, even though it may satisfy the other 3 rules. Other exceptions include fraud or tax cheat accusations, which would allow the IRS to pursue an exception to discharge. Finally, even though your taxes might not be dischargeable, you should still seek the assistance of a bankruptcy attorney to determine whether a Chapter 13 filing would provide tax debt relief and be a  beneficial way to repay the back income taxes in a controlled fashion over a term of 3 to 5 years, often without additional interest nor penalty.

John C. Colwell is a California bankruptcy attorney with over two decades of experience.

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Rob Cohen

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.
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