Can I Discharge Federal or State Taxes in Bankruptcy?

“I heard that I can discharge my tax debt, is that true?”  The preceding question is one that is frequently posed in our Utah bankruptcy practice.   Federal and State income taxes may be eligible for discharge under Chapter 7 or Chapter 13 of the bankruptcy code under certain circumstances.

Chapter 7 bankruptcy provides for a full discharge of allowable debts.  Chapter 13 bankruptcy is a debt consolidation and a partial repayment of debts over a period of time; allowable debts that are unpaid after completion of the repayment plan are then discharged.  As a result, under either Chapter 7 or Chapter 13 may be discharges, so long as the requirements are met for discharge.

There are five rules that determine dischargeability of tax liabilities:

  1. The due date for filing the tax return is at least three years prior to the filing of the bankruptcy petition.
  2. The tax returned was “filed” at least two years prior to the filing of the bankruptcy petition.
  3. The tax assessment is at least 240 days old (as of the date of filing the petition).
  4. The tax return was not fraudulent.
  5. The taxpayer is not guilty of tax evasion.

First, the tax debt must arise from a tax return that was due at least three years prior to filing the bankruptcy petition.  This requirement includes any extensions.  So, if you filed for an extension, the time period is calculated from the due date of the extension.

Second, the debtor must have filed a return.  This requirement is met when a debtor participates in (provides information and documentation) or signs off on a return, pursuant to Internal Revenue Code section 6020(a).  This requirement apparently does not include, however, a service-filed return pursuant to Internal Revenue Code section 6020(b) where the filing is not done with the debtor’s cooperation and is based on information obtained by the taxing authority on its own.

Third, the taxing authority must assess the tax at least 240 days before filing the petition.  This is when the taxing authority sends you a notice of assessment or the IRS issues a certificate of assessment.

Fourth, the tax liability is only dischargeable if you did not file a fraudulent return.

Fifth, your tax liability cannot be discharged if you are guilty of intentionally trying to evade taxes.

If the five requirements listed above are met, the taxes are dischargeable.  In some cases it may be advantageous to wait to file the bankruptcy petition until the tax liabilities are dischargeable.  If taxes are not dischargeable, but the debtor cannot wait to file for bankruptcy, the Chapter 13 bankruptcy may provide for additional benefits for dealing with the tax debt.  To assess a particular situation and determine the dischargeability of tax debt, you should consult with an experienced bankruptcy attorney.

2 replies
    • Russ Weekes
      Russ Weekes says:

      It is generally the same. Some federal circuits have a different interpretation of “undue hardship”, but the requirement of finding an undue hardship applies.

      Reply

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