It is possible to discharge income tax obligations in bankruptcy; however, taxes must meet certain requirements to be dischargeable. Taxes that fail to meet such requirements fall within the Bankruptcy Code’s exception to discharge, found in 11 U.S.C. § 523(a)(1). While discharging income taxes can be complicated, there are three basic rules that apply:
The debtor owes federal income taxes for years 2013, 2014, and 2015. The debtor did not have an extension to file the returns for any of these years. Consequently, the return for 2013 was due on 4/15/2014, the 2014 return was due on 4/15/2015, and the due date for the 2015 return was 4/18/2016 that particular year. The debtor filed a bankruptcy petition on 5/26/2020.
Because the above taxes all came due no later than 4/18/2016, and more than three years passed between 4/18/2016 and the 5/26/2020 bankruptcy filing date, all of the taxes meet the three year rule. But what if Debtor obtained a six-month extension to file the 2015 return, thereby extending the deadline to October 18, 2016? The tax still meets the three year rule because the bankruptcy petition was filed after October 18, 2019.
Here is an example of tax that does not satisfy the three year rule, and therefore cannot be discharged:
The debtor has an unpaid debt for tax year 2018. The 2018 return was either due on 4/15/2019 or 10/15/2019, depending on whether the debtor had an extension to file the return. The time period between the deadline for filing the 2018 return and the 5/26/2020 bankruptcy filing date was well under three years, making it a priority tax claim.
All three of the above rules must be met for tax debt to be eligible for discharge. Moreover, if the debtor made a fraudulent tax return, or willfully attempted in any manner to evade or defeat such tax, the tax debt is excluded from discharge. 11 U.S.C. § 523(a)(1)(C). A debtor with a significant amount of priority non-dischargeable income tax debt should consider the benefits of a Chapter 13 bankruptcy. A Chapter 13 repayment plan can be used to pay the tax debt in full over a three to five year period, plus accrued tax penalties are usually dischargeable as a general unsecured debt.
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