Income Taxes Discharged in Bankruptcy - Know How

  • Taxes

Can Income Taxes be discharged in Bankruptcy?

The unsecured debts such as medical bills or credit card bills are discharged after people get a bankruptcy discharge. This is 3-4 months from a bankruptcy filing in case of Chapter 7 and after 3-5 years in the case of Chapter 13 repayment plan. However, some debts are not discharged like government taxes or spousal/child support, etc. Though under certain circumstances, local, state and federal income taxes can be discharged along with any interest and penalty fees in Chapter 7, Chapter 11 and Chapter 13 bankruptcy. However, not all taxes are dischargeable. To discern which taxes can and cannot be discharged, you need to consult with experienced lawyers like those of Dallas based firm, Recovery Law Group.

How are income taxes discharged in bankruptcy?

A substantial part of your income tax debt can be discharged in bankruptcy if it meets the 3-2-240 rule also known as the 3-year, 2-year, and 240-day rule:

  • According to the 3-year rule, any owed income taxes must be due for at least three years before the individual seeks a discharge by bankruptcy. Example: In case an individual’s income taxes were due on April 5, 2016, the person can file for bankruptcy no sooner than April 5, 2019.
  • As per the 2-year rule, the tax returns must have been filed a minimum of two years prior to the filing of the bankruptcy Example: If any person’s taxes are due on March 15, 2015, but the tax forms weren’t filed till May 1, 2016, the individual cannot file for bankruptcy until May 1, 2018 (two years after filing and more than three years from the due date).
  • Under the 240-day rule, evaluation of taxes must take place a minimum of 240 days prior to a bankruptcy filing or not at all. Example: In case a petitioner filed for his/her 2010 taxes on April 5, 2012, and then meets the 3-2-240 requirement on April 5, 2015, they can file for bankruptcy. However if a correction is filed or a new amount due to her is assessed by the IRS due to an error on their part, the 240-days clock will start over.

Other actions, such as getting a taxpayer assistance order, previous bankruptcy filing or an offer in compromise, etc. may affect the 3-2-240 requirements. The specified time periods under the rules mentioned above are then deferred until the time any of the above-mentioned actions is pending. It should be kept in mind that any successful discharge of income tax in bankruptcy does not automatically end a tax lien. However, options are available to deal with such situations after bankruptcy. Another factor to keep in mind is that planned tax evasions and fraudulent activities are circumstances which may cause you to become ineligible for discharge. In case you wish to weigh your options regarding taxes and discharge, consult bankruptcy attorneys at 888-297-6023.