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Mar 2011

Bankruptcy can discharge some old income taxes.

Posted by / in General Information About Bankruptcy Law / 5 comments

People often ask me if there are any taxes that bankruptcy can help with.

Here’s the rule.  You can discharge income taxes if they were due more than three years ago, if you filed them close to on time, and if the tax has been assessed for more than 270 days.

Bankruptcy can discharge taxes three years after they were due... But they have to have been filed almost on time.

When are your taxes due?  April 15 usually.  Later, if you got an extension.  (Virginia state taxes are due May 1.)  So, your 2007 Federal income taxes were due April 15, 2008.  Three years after that is April 15, 2011.  That’s the three year rule.  (Unless you got an extension.)

Filed almost on time.   The law says they have to have been filed for at least two years, but you can’t always  count on that.  For example, suppose you filed your 2002 taxes in April 2009.  Could you discharge those taxes in bankruptcy filed April 18, 2011?  No!  You meet the three year and two year rules, but something else trips you up.

What trips you up is this:  You can’t discharge taxes if you “willfully attempted to evade” the tax.  How does that work?  Basically, when the IRS gets mad that you haven’t filed your tax return, they file one for you.  (It’s called a substitute for return.)  They guess how much you owe, so they can go after you for it.   If the IRS files a substitute for return, they classify you as a willful evader.  Filing a correct return later doesn’t get you out of that.  You are a willful evader.  You can’t discharge that year’s tax.

That’s why I say, bankruptcy can discharge taxes if it’s three years after they were due and filed almost on time.  (Almost on time, meaning “more than two years ago” and “before the IRS filed a substitute for return.”)

Some people no longer remember whether they filed on time.  (Or at all).  You can call the IRS and find out.  Call 1-800-829-1040.  (You have to “listen carefully to our menu options.”  Expect to sit on hold for maybe half an hour.  When you get through, you need to order an “account transcript.”   They will mail or fax it to you.

The account transcript shows when the taxes were due, when the IRS shows they were filed, and if they filed a substitute for a return.

(There’s another transcript the IRS has, called a “literal transcript.”  The “account transcript is the one you want.”)

What’s this about assessed?  Taxes are usually assessed when you and the IRS agree they are due.  So when you send in your tax forms and they show you owe money, the taxes are assessed right then.  The 270 day rule can come up  as a correction or an audit.

If the IRS gets a W-2 for a job you forgot to include, that tax is assessed later.  Or they they audit your business, and say you owe more money.

If you are arguing with the IRS, then you delay the date of the assessment.   Then the date of the assessment isn’t until you and the IRS agree, or until you have exhausted your ability to fight.  So if the IRS hits you with an audit and you are planning to file bankruptcy anyway, you want to agree, and not fight, to get the 270 days ticking.  (You for sure need to talk to a tax professional if you are facing something like this.)

What about business taxes?  What the IRS calls trust fund taxes is what most people mean when they say business taxes.  You owe trust fund taxes on money you withheld from your employees’ paychecks–and then did NOT send in to the IRS.  Bankruptcy can’t help with those.  (The IRS considers that money you basically stole from them.  They don’t let you off the hook for that.  Ever.)

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Robert Weed has helped fifteen thousand people file bankruptcy in Northern Virginia. Robert Weed is a frequent panelist and speaker at the meetings of the National Association of Consumer Bankruptcy Attorneys. He is one of Northern Virginia’s most experienced personal bankruptcy lawyers. As an expert on changing consumer bankruptcy laws, Robert Weed has been interviewed on local and national TV and quoted in newspapers across the country.

  • Steve

    March 23, 2011, pm31 3:23 PM

    Great concise commentary on an area that can be quite complex and confusing. I usually advise clients to file an adversary (a lawsuit within your bankruptcy) against the U.S. Dept. of Treasury to declare the taxes dischargeable to avoid any issues down the road. A court order stating that the taxes are dischargeable is more foolproof than to simply list the tax debts on Schedule F. More times than not the government doesn’t even answer the complaint. A bit more costly but well worth the assurance IMHO.

  • Keith

    August 29, 2011, pm31 1:51 PM

    We filed chapter 13 bankruptcy on 4/24/2006, our 2006 taxes were filed April 2007. We also filed 2007 taxes on time in April 2007. We received a notice of audit in June 2008 which resulted in a deficiency notice of additional taxes due because of the non allowance of expenses. We were advised by the IRS that since we were in bankruptcy nothing could be done until we were discharged and were unable to file an appeal in US Tax Court since the bankruptcy was in process. Our bankruptcy discharged in November 2010 and to this date, the tax problems are unresolved and not even the IRS has a clue. Would we be eligible to file an adversary (a lawsuit within your bankruptcy) against the U.S. Dept. of Treasury to declare the taxes dischargeable based on the above circumstances?

    • Robert Weed

      August 29, 2011, pm31 2:34 PM

      You need to talk to a lawyer who specializes in doing taxes and bankruptcy law.

  • james

    July 10, 2015, pm31 1:37 PM

    I closed my chapter 7 bankruptcy march 30 2015. The IRS rep showed at my bankruptcy claiming I owe $230k from 2002.

    I have my taxes from 2002 as I managed a hedge fund and the taxes were done by a major firm. I did not make anywhere close to the quoted amount and asked the IRS for the 2001 transcript. The IRS claims they purge all records after & years (+,-).

    My biggest problem is the IRS claims they filed for me.

    Please advise,


    • Robert Weed

      July 10, 2015, pm31 5:22 PM


      You need to talk to a tax law specialist. $230,000 is a big number!

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