Can Taxes Be Eliminated in Bankruptcy?

Tax Day is on us once again. I think it is kind of funny that my calendar I use here at work actually has a preset “holiday” alert for Tax Day – probably some sort of government conspiracy.  But if you are preparing your taxes today and realize that you didn’t keep quite enough out of each paycheck to cover your tax bill you may be wondering what your options are. With that in mind this post is focused on when you can eliminate your tax debt in bankruptcy.

Generally, Taxes Aren’t Eliminated in Bankruptcy

If you were hoping you would be able to file bankruptcy on the tax debt you just incurred, I hate to be the one to break this to you, but you can’t.  Generally tax debt, specifically recent tax debt, is not eliminated in bankruptcy.

But Wait, Some Tax Debt Can Be Eliminated in Bankruptcy

Many are surprised to learn that some tax debts can be eliminated in bankruptcy.  Here are three (3) basic rules to help you determine if your income tax debt is dischargeable in bankruptcy:

Rule #1 – You Filed a Tax Return the Year the Tax Was Due

If you didn’t file a tax return the year that it was due then you are totally out of luck.  However, if you filed your tax return but weren’t able to pay the tax debt associated with that tax return, then you can go on to the next step…

Rule #2 – It Has Been at Least Three Years 

Income tax debt that is at least three years old may be eligible to be discharged in bankruptcy.  It is important to note that the three years is calculated from the date when the tax return was due (April 15 or October if you received an extension). For example, the tax debt that you incurred for the year 2005 was reflected on your tax return you filed on April 15, 2006.  This means that the three years started ticking on April 15, 2006 and you would not meet the three year requirement until April 15, 2009.

Rule #3 – Your Tax Has Not Been Reassessed Within the Last 240 Days

This one can seem a little complicated. But all this rule means is that the taxing body (I.R.S. or State) has not reassessed the tax that you owe at anytime in the last 240 days.  This means that there hasn’t been an audit or other procedure that resulted in a revision of the amounts owed.

One final thing to remember…

Personal Income Taxes May Be Discharged, But Not Payroll Taxes

The taxes that I am talking about in this article are personal income taxes.  If you are self employed and failed to pay the payroll taxes for your employees (also known as “trust fund” taxes) then this analysis does not apply to you.  Payroll taxes are never dischargeable.