It is at about this time each year when advertising on television and radio increases by various companies stating they can help you if you owe back income taxes.
I am often asked if back income taxes can be discharged, that is gotten rid of, in bankruptcy and the answer is not always an easy one. BUT please remember that even if they are not dischargeable in a straight (chapter 7) bankruptcy case, you can include the tax debt in a chapter 13 reorganization and repay the what you owe over time.
Discharging Income Back Taxes
Income taxes that are owed “may” be dischargeable in bankruptcy if the following requirements are met:
- The tax return for the year or years in question were due more than 3 years before the date the bankruptcy case was filed;
- The tax return was filed at least 2 years before the bankruptcy case was filed; and
- There has been no new assessment of the taxes within the 240 days before the bankruptcy is filed.
What Are the Requirements?
These requirements may seem straightforward, but it is essential to first get an account transcript from the IRS for each year taxes are owed to see if they have been met. Let me assure you that reading and understanding an IRS transcript is not easy and you will need someone familiar with one to be able to interpret the same. Now let’s review the 3 requirements.
- Tax returns are normally due on April 15 of the following year. Therefore, the 2014 federal tax return is due on April 15, 2015 (if the 15th is on a Saturday or Sunday, then the due date could be the 16th or 17th). If an extension is requested, then the due date would likewise move to October 15, 2015 or the 16th or 17th. For this example, assume the 2014 return is filed on 4-15-15 and thus the date necessary to meet the first requirement is April 16, 2018.
- The 2 year rule means that the return or returns in question must have been filed with the IRS at least 2 years before the bankruptcy case is filed. So even though you may meet the 3 year requirement above, if the bankruptcy case is filed 1 year after the tax return is filed, the taxes owed are not dischargeable.
- Has there been a new assessment of taxes for a particular tax year within 240 days of the bankruptcy case being filed? For example, if the IRS has disallowed a tax deduction and you owe more tax, this rule will impact your ability to discharge the tax. If the assessment took place 220 days before the bankruptcy case is filed, then the taxes will still be owed after the bankruptcy.
These 3 requirements seem simple enough but as you can see from the explanations above, it may not be that simple. There are other situations too detailed to discuss in this short explanation that would affect the time periods mention above.
Owing the IRS is serious business and not something to put in the hands of an out of state tax resolution company which you only contact is by phone or email. Please seek the advice of a local professional who you can meet with face to face to discuss your situation. At Bond and Botes, we always offer a free initial consultation to review your situation.
Robert Reese is a Managing Attorney at the Bond & Botes Law Offices in Birmingham, Alabama. He holds a Bachelor of Science from Jacksonville State University, and a Juris Doctorate from the Birmingham School of Law. Robert is also a member of the National Association of Consumer Bankruptcy Attorneys (NACBA). Read his full bio here.