When Do Income Taxes Become Dischargeable In Bankruptcy?

When it comes to discharging state and federal income taxes in bankruptcy, the courts use what may appear to be a complicated set of rules and timeframes.

Let’s Try to Make it Simple for Those Considering Bankruptcy:

  1. Taxes which had a due date which was 3 years before filing bankruptcy may be dischargeable. For example, if a debtor files bankruptcy in May 2011, then taxes which had a due day of April 2008 may be dischargeable in bankruptcy. However, if the debtor filed an extension for October 2008, then those taxes might not be dischargeable in bankruptcy because the due date includes any extensions.
  2. If the tax return was filed on time or if it filed late and it was done at least 2 years before the bankruptcy filing, it might be dischargeable.  So that means that if the due date was April 2008 but was filed late, let’s say it was filed May 2010, the debtor would not be able to discharge the taxes in bankruptcy until after May 2012.
  3. If the taxes meet the above conditions (plus there was no evasion or fraud) and there was an assessment of taxes for the tax return in question, that assessment must have happened at least 240 days before the bankruptcy filing.
  4. Finally, debtors considering bankruptcy for the purpose of discharging back taxes also need to look at any adjustments made by the IRS during the tax years in question. State taxing authorities must be notified of adjustments in taxable income because if they are not notified, that failure to notify could prevent the debtor from discharging the state taxes in bankruptcy.