What the IRS doesn’t want you to know about taxes and bankruptcy

There is a common misconception that taxes are not dischargeable in a bankruptcy proceeding. However, under certain circumstances, taxes can be discharged. Let’s face it, this is the government, all of the cards are stacked in their favor…but if the tax liability meets certain criteria, the tax can be discharged by a bankruptcy filing. In order for taxes to be dischargeable in bankruptcy certain requirements must exist.

Generally speaking, only income tax liabilities can be discharged in bankruptcy only if the taxes meet all of the following general requirements:

1. The tax itself must be a tax that is due and payable in excess of three years (the due date of the tax may be extended if an application for extension of time to file the tax return was filed); and
2. All tax returns must have been on file with the applicable taxing authority for more than two years before the bankruptcy case is filed; and
3. Any assessment related to the tax liability must have been made more than 240 days prior the filing of the petition in bankruptcy.

Of course, there are additional exceptions to the exceptions. If the government taxing authority can establish that the taxpayer made a fraudulent return or willfully attempted in any manner to evade or defeat the tax claim due, the tax could still be determined to be nondischargeable even if it meets the first three criteria. Additionally, if the return was filed late, some circuit courts have held that the return is not “filed” for purposes of the two year requirement. Furthermore, if the taxpayer did not actually file the return but instead the return was prepared and filed by a government revenue agent on behalf of the taxpayer, the tax return may also not be considered to be “filed” for purposes of the two year requirement.

Even if all of the foregoing requirements are satisfied, the calculation of applicable timeframes could be determined to have been tolled or extended under certain circumstances. For instance, if the taxpayer filed an offer in compromise with the IRS or was involved in any prior bankruptcy proceedings, or a collection due process hearing was requested, all of the timeframes mentioned previously, can be extended during the term of that that offer in compromise, or bankruptcy, or collection due process hearing request was pending plus up to an additional 90 days.

To find out if your tax liabilities qualify for discharge under the bankruptcy code call for a free consultation with one of our experienced bankruptcy attorneys. Call (414) 461-7000.

Source: Attorney Todd C. Esser

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