It is commonly believed that filing bankruptcy will not eliminate one’s tax debts. This is not necessarily the case. Income tax liabilities can in fact be discharged in bankruptcy if certain conditions are met.
There are five basic rules that must be satisfied in order for income taxes to be wiped out in bankruptcy:
1. The taxes in question must be more than three years old. The three years is measured from the date that the tax return for the year is question was due, including extensions. For example, if one owes income taxes for tax year 2007 and files bankruptcy in May of 2011, this rule will be satisfied provided the taxpayer did not receive an extension. If the taxpayer received an extension, then the taxpayer would have to wait until 3 years after the extension date, regardless of whether the person actually used the entire extension.
2. The tax return for the taxes in question must have either been filed on time or if not filed on time, been filed for at least two years prior to the filing of the bankruptcy. So let’s say that one owes taxes from 20 years ago, but just now got around to filing the returns. Those tax obligations would not be able to be discharged in bankruptcy. That person would have to wait at least two years before filing the bankruptcy in order to be able to discharge those taxes.
3. The taxes must have been assessed at least 240 days prior to the bankruptcy. Ordinarily, when one files a tax return and owes taxes, the IRS assesses the tax on that date. So in most cases, the filing of the tax return and the assessment date are the same. However, sometimes the IRS will assess additional taxes after the return is filed. This can be caused by either the IRS receiving a W-2 that was not included with the tax return, or as the result of an audit.
4. The taxpayer’s return was not fraudulent.
5. The taxpayer did not attempt to evade or defeat the tax.
if all five of these rules have been satisfied, the the taxes are probably going to be able to be eliminated in bankruptcy.
If you owe income taxes that appear to meet these requirement, speak with a Kentucky or Indiana bankruptcy attorney in order to determine your rights.