Bankruptcy Analysis and Discharge of Taxes
If the obligation is due fewer than three years from the date the return was due, it is considered a priority tax and could not be discharged. Many liabilities that are three years or older from the due date of the return may result in a bankruptcy discharge of the taxes because they are not considered a priority tax.
The tax return must also have been filed at least two years before the bankruptcy.
Keep in mind that if you are in business, any withholding taxes due from payroll for your employees will not result in a discharge of them in bankruptcy.
If the state or IRS filed liens against your property, the tax still might be discharged if the tax is older than three years. However, the lien itself will create a new challenge. Even though the obligation has now been discharged in bankruptcy, the lien itself will survive through the bankruptcy. The lien will remain attached to the taxpayer's assets at the full value of the taxpayer's property for the duration of the bankruptcy. Even after the bankruptcy has been discharged, the state or IRS could still seek to get the amount due from the taxpayer's assets.
TAXES IN A CHAPTER 7 BANKRUPTCY
In order for a liability due to the IRS to be considered for a bankruptcy discharge in a Chapter 7 bankruptcy, the tax liability needs to meet the following bankruptcy code requirements:
- The liability is due a minimum of three years prior to the bankruptcy filing.
Example: The taxes filed for the year 1999 become due April 15, 2000. They are then eligible for discharge on April 16, 2003.
Note: Be aware that there can be no extension requests to file a return whether this return was completed by a representative or by the individual themselves. However, if the request for extension had been made, then the three years will be extended to the actual date the extension came due.
- The returns must be filed a minimum of two years prior to the filing for bankruptcy.
A. A return needed to have been actually filed.
B. If the IRS had filed a Substitute for Return (SFR) that return will not qualify for having filed a return for bankruptcy purposes. The taxpayer is the one who actually has to file a return.
- The liability assessment must be made a minimum of 240 days before filing. The return cannot be fraudulent.
Contact Our Firm
If you owe money to the IRS and need a tax attorney to develop and implement the right action plan for you, call Robert T. Leonard directly at the Law Offices of Robert T. Leonard at 818-224-7935 or toll free at 888-408-9486, or fill out the online form on this website for a free, confidential, initial case consultation. We will review your case and your options with their respective benefits and drawbacks, and any alternatives to the legal process that you may have. My office accepts Visa, MasterCard, American Express and Discover as payment.