Question About Income Taxes In Chapter 7 Bankruptcy

Treatment of income tax debt in Chapter 7 bankruptcy is a complicated subject. There are many rules and exceptions to the rules applicable to determine if past due taxes can be discharged. I received the following question by email:

"I was planning on filing bankruptcy next month and just went through an IRS audit for the tax year 2005. I owe $10,000 now to the IRS for mistakes made on my 2005 tax return. This includes interest and penalties. I was told that I could include this amount owed to the IRS in bankruptcy as long as I waited 240 days from the time I was assessed the tax since the return is 3 years old. But, there seems to be conflicting opinions on this as I was also told by my tax attorney that it can't be discharged at all, or maybe it can if I wait 3 more years. "

The general rule is that income taxes are not dischargeable if they relate to a tax return due to be filed less than three years prior to the bankruptcy petition or if the taxes were assessed within 240 days of the petition. There are additional exceptions when returns were filed late or when there is tax fraud.

Assuming this debtor received no filing extensions his tax return for the tax year 2005 was due on April, 15, 2006. If so, his income taxes cannot be discharged by a bankruptcy filed prior to April, 2009. If the debtor used an automatic filing extension to October, 2006, the three year period would end in October, 2009. The point is that the three year runs from the due date for the tax return and not the end of the tax year.

If the taxes were assessed today, bankruptcy would have to wait until 240 days from today’s date of assessment which would fall in May, 2009. Absent a filing extension, this debtor could discharge 2005 taxes (assuming no applicable exception) by filing Chapter 7 bankruptcy in May, 2009, given my assumed facts.

Taxation in bankruptcy is a sub-specialty of bankruptcy law. I am not particularly expert in this speciality. I refer my income tax/bankruptcy issues to Larry Heinkel in St. Petersburg, Florida. larryheinkel@lawyer.com

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida