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The Conditions for Discharging Income Taxes in Bankruptcy

For an income tax obligation to be discharged (legally written off) in bankruptcy depends mostly, but not only, on the how old it is.

Discharging an income tax debt involves meeting all of four conditions. So it may sound easy to know whether you can discharge a particular tax owed — you just check off these conditions to see that they are all met.

It may sound easy, but often these conditions are not necessarily easy to apply. There is a good reason why people can be confused about taxes under bankruptcy — the laws are more complex than they may sound.

Here are the four conditions. But be sure to meet with a very experienced bankruptcy attorney about how these would apply to your personal situation.

1. The Three-Year Condition
Have three years passed since the tax return was due? Every income tax debt has a specific date when its tax return must be filed. That’s of course usually April 15 of the following year, or the Monday/first weekday after when that date when it falls on a weekend or holiday. Three years must have passed since that specific due date to meet the first condition.

But there’s an important twist. If you filed an extension of time to file the return for that year — usually extending the due date from April 15 to October 15 — the three-year period begins only at that extended due date. For example, the tax return for the 2009 tax year was due on April 15, 2010, but if you got an extension it was due on October 15, 2010. The three-year condition would then be met by filing for bankruptcy after April 15, 2013, if there was no extension, but only after October 15, 2013, if there was an extension.

2. The Two-Year Condition
Have two years passed since the tax return was actually filed, regardless of when that return was due?

To meet this condition, you must have in fact filed the tax return — a substitute-for-return (SFR) prepared by the IRS on your behalf doesn’t count.

3. The 240-Day Condition
Have 240 days passed since “assessment” of the tax? “Assessment” is the formal determination of your tax liability by the IRS or other tax authority. That usually occurs when the IRS reviews and accepts your tax return, generally within a few weeks after filing. However assessment can be delayed because of a disputed tax amount resulting from an audit or a challenge in tax court. In these situations, the above three-year or two-year time periods may have already passed by the time of the assessment. That relatively rare situation is when this third condition applies: the tax cannot be written off unless the bankruptcy case is filed more than 240 days after this assessment.

4. The Fraudulent Tax Return/Tax Evasion Condition
If you are dishonest on your tax return — not reporting some of your income or claiming nonexistent deductions — or if you evaded paying the tax in any way, that tax will not be discharged, even after meeting the other three time-based conditions.

Again, this blog is intended to give you an idea of whether a particular tax debt will get discharged in bankruptcy. But it is very important to understand that, beyond the challenges of applying these four conditions, there can be various other complications, like the effects of tax liens, a prior bankruptcy, amended returns and mistakes on returns. So if you owe taxes and are considering bankruptcy, there is no question that you should get legal advice from an experienced attorney.

So if you live in the Dallas-Fort Worth metroplex, please schedule a no-obligation, free, confidential consultation with us at Bailey & Galyen so that we can analyze your tax debts and advise you about your options. Call us today at 800-208-3104. Or you can reach us here. We look forward to helping you get beyond your current tax worries to a well-deserved peace of mind.