Bankruptcy Tax Discharge Rules

Many people do not realize that in certain situations an individual might eliminate old tax debts through the use of a bankruptcy. Even many attorneys and accountants do not understand the rules that a taxpayer must satisfy for bankruptcy to eliminate unpaid taxes.

The most common type of bankruptcy for an individual is a Chapter 7 or a liquidation. Chapter 11 bankruptcies involve repayment plans, and Chapter 13 bankruptcies involve reorganizations. Here, we shall focus on a Chapter 7 bankruptcy. In a Chapter 7 bankruptcy, the bankruptcy trustee “marshals” the individual’s assets and liabilities.

Typically, both Federal and state income taxes may be discharged -- if the taxes are “old enough.” Palm Desert bankruptcy tax discharge lawyers Sanger & Molever can advise you of the rules you must satisfy to possibly discharge your outstanding unpaid income taxes. They can walk you through the rules you must satisfy to discharge tax liability in a Chapter 7 filing. Their experienced attorneys will explain the following rules: (i) your unpaid tax relate to a year which had a tax return due date more than 3 years before the filing of the bankruptcy petition; (ii) you filed the tax return more than 2 years before the filing of the bankruptcy petition; (iii) the IRS assessed the income tax you owe, more than 240 days before the filing of the bankruptcy petition; (iv) the income tax was not assessed due to the filing of a fraudulent income tax return, and the individual did not attempt to evade or defeat the tax (see IRC Section 7201); (v) the tax was not assessable when the taxpayer filed the bankruptcy petition; and (vi) the income tax was unsecured.

The above recited-rules for discharging income taxes in bankruptcy are complicated and technical, because there are many tolling events. The application of the rules are highly fact sensitive, which necessitate the thorough reading of the IRS’s Records of Account (i.e. “transcripts”).

To explore whether filing for bankruptcy might discharge large unpaid taxes, you might want to consult with Palm Desert bankruptcy tax discharge lawyers Howard Sanger or Jeff Molever to first confirm whether you satisfy the above rules, and the extent to which tolling events might preclude a bankruptcy eliminating unpaid taxes.

Example: X failed to pay $300,000 of taxes from five years ago. X filed all of his tax returns timely. It appears the 3 Year Rule, the 2 Year Rule and the 240 Day Rule have been met. So X filed bankruptcy. At the time X filed bankruptcy, because of interest and penalties, the unpaid $300,000 owed the IRS, has grown to $400,000. After filing bankruptcy, X discovers he flunks the tests, and the $400,000 owed the IRS remains outstanding. Why? Because instead of consulting with lawyers such as Sanger & Molever, X saw on TV an ad that claimed the ad’s sponsor resolved an unpaid tax of an unnamed taxpayer, by getting a refund. Seeing the TV ad, X contacted the sponsor of the TV ad. The sponsor initially sought an installment agreement for X; subsequently filed for an Offer In Compromise for X, and finally filed for bankruptcy to discharge the $400,000 owed the IRS. The sponsor’s actions amounted to “tolling events”, such that X’s bankruptcy action did not discharge the $400,000 owed the IRS.

If you need help to determine whether you satisfy the bankruptcy tests, or you need assistance to determine the tolling events disclosed on the IRS’s Records Of Account, call Sanger & Molever office for a consult.