Are Federal or State Taxes Dischargeable in Bankruptcy?

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One of the most frequently asked questions that we hear in our Utah bankruptcy practice is whether taxes can be discharged in bankruptcy. The answer to such a seemingly simple question is actually quite complicated. Some federal and state income taxes may be eligible for discharge under Chapter 7 or Chapter 13 of the bankruptcy code under certain circumstances.

Under section 523 of the bankruptcy code there are five rules that determine dischargeability of tax liabilities:

(1) The due date for filing the tax return is at least three years prior to the filing of the bankruptcy petition. This requirement includes any extensions. So, if you filed for an extension, the time period is calculated from the due date of the extension.

(2) The tax returned was “filed” at least two years prior to the filing of the bankruptcy petition. This requirement is met when a debtor participates in (provides information and documentation) or signs off on a return, pursuant to Internal Revenue Code section 6020(a). This requirement apparently does not include, however, a service-filed return pursuant to Internal Revenue Code section 6020(b) where the filing is not done with the debtor’s cooperation and is based on information obtained by the taxing authority on its own.

(3) The tax assessment is at least 240 days old (as of the date of filing the petition). This occurs when the taxing authority sends you a notice of assessment or the IRS issues a certificate of assessment.

(4) The tax return was not fraudulent; and

(5) The taxpayer is not guilty of tax evasion.

If the five requirements listed above are met, the taxes may be dischargeable. In some cases it may be advantageous to wait to file the bankruptcy petition until the tax liabilities are dischargeable. In any event, the only way to discharge tax debt for certain is to file an adversary proceeding. An adversary proceeding is a separate case so to speak within your bankruptcy case. Courts in some jurisdictions also include additional requirements, so it is important you consult with a qualified bankruptcy lawyer.

To assess a particular situation and determine the dischargeability of tax debt, you should consult an experienced bankruptcy attorney.

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