IRS Bankruptcy Tax Relief - Get Relief From Your Tax Problems
Most people mistakenly believe that federal income taxes are never dischargeable in a bankruptcy. This is incorrect. Although the intersection of the Internal Revenue Code, the United States Bankruptcy Code and IRS lien and levy rights is complicated, bankruptcy is often the best way to solve a serious tax problem and stop IRS collections.
tax relief

Guidelines - Income Tax Discharge

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) enacted by Congress and signed by the President in 2005 essentially merged the tax discharge rules applicable to Chapter 7, Chapter 13 and Chapter 11 bankruptcies. These rules are complex, and their specific application to a taxpayer depends on the individual facts and circumstances of each particular case. In simple terms, most "old" taxes can be discharged, while "new" tax liabilities are treated as "priority taxes" and are non-dischargeable.

The ability to discharge a tax in bankruptcy, and the selection of the proper bankruptcy chapter, is primarily determined by four dates:

(1) the last date on which the taxpayer’s return was due for the year of the delinquent tax;

(2) the date the taxpayer actually filed the applicable return;

(3) the date the tax in question was assessed by the IRS; and

(4) the proximity of the foregoing dates to the taxpayer’s bankruptcy case filing date.  

These time requirements are found in Bankruptcy Code (the "Bankruptcy Code") Sections  507(a)(8)(A)(i), 523(a)(1)(B) and 507(a)(8)(A)(ii), respectively.  Generally, the Bankruptcy Code allows an individual to discharge an income tax if all of the following requirements are met:

  • The tax return was filed more than two years before the bankruptcy filing;

  • The tax return was due more than three years before  the bankruptcy filing;

  • The tax liability was assessed more than 240 days before the bankruptcy filing;

  • The taxpayer did not file a fraudulent tax return or engage in tax fraud; and 

  • A tax return was actually filed for the delinquent tax liability.

In plain language the bankruptcy discharge of a personal income tax liability is primarily governed by the lapse of different time periods from the tax return due date, the actual return filing date and the tax assessment date, to the date of a taxpayer’s bankruptcy filing date.  These periods can be thought of as separate statutes of limitation periods that once expired will convert a tax from a non-dischargeable "priority tax" to a dischargeable "non-priority tax" that may be dischargeable in a bankruptcy case. An income tax will be dischargeable (subject to certain bad conduct rules) if all of the foregoing time periods have expired:

(1)  the taxpayer’s return was due (including all extensions) more than 3 years before the bankruptcy filing (the 3 -Year Look Back Rule);

(2) the return was actually filed more than two years before the bankruptcy filing (the 2-Year  Filing Rule); and

(3) the tax was actually assessed more than 240 days before the bankruptcy filing (the 240-Day Assessment Rule). 

Unfortunately, calculation of the beginning and end of the 2-Year Rule, 3-Year Rule and 240-Day Rule is not simple, and often requires experience in reviewing and interpreting Internal Revenue Service tax transcripts. Additionally, the running of these time periods can be extended, or tolled, by many different events. For example, a prior bankruptcy stops the clock, or tolls, the running of the Two-Year Filing and Three-Year Look Back time periods; an offer in compromise will toll the running of the 240-Day period; and a Collection Due Process Appeal of a proposed assessment will toll the commencement, and hence, the running of the 240-Day period. The various time and limitation periods for tax collection and bankruptcy discharge, and the possible occurrence of events that may toll the running of these "limitations" periods,  are among the most important considerations in planning for and implementing strategies to solve a client’s delinquent tax obligations.  

If you have a serious tax problem, you need an attorney who understands how to solve serious problems involving both bankruptcy and tax law. Fried & Rosefelt, LLC have that professional experience. Contact us today by completing the Consultation Request form or by calling our law office at (301) 656-8528 to receive the proper legal tax counsel.

 
  
 
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