The rumor on the street is that income taxes cannot be discharged. As a general rule, most tax liabilities cannot be discharged but there are several exceptions including the discharge of certain income taxes. Please keep in mind that real estate taxes are treated differently than income taxes.

When You Can Discharge Past Due Income Taxes?
You can discharge federal income taxes in bankruptcy when: Your liability is has not been caused by your commission of fraud or willful evasion. For instance, if you filed a fraudulent tax return or otherwise willfully attempted to evade paying taxes, such as using a false Social Security number on your tax return, a discharge in bankruptcy is not available.

1. Your liability qualifies for discharge under “Three Year Rule.” The Three Year Rule means that to discharge a eliminate a tax debt, the tax return must have been timely filed at least three years before you filed for bankruptcy. This usually means April 15th (sometimes this date is changed because the 15th for the applicable year falls on a weekend and the IRS changes the filing date to the 17th) of the year the return was due. If you requested an extension, then timely filed may mean August 15 or October 15 of the applicable year.

2. You also qualify under the “Two Year Rule.” The “Two Year Rule” provides that you must have also actually filed the tax return which has resulted in the tax liability that you seek to discharge at least two years before filing the bankruptcy. If the IRS filed a return for you, the filing does not count to qualify you under the “Two Year Rule” unless you agreed in writing that they could file a return for you. If you never file a tax return, you can never discharge the taxes you owe for that year in a Chapter 7 bankruptcy.

3. In the event that the IRS has assessed your tax liability against you, they did so more than 240 days prior to your filing for bankruptcy. This is the so-called “240 Day Rule.” The “240 Day Rule provides that your income tax debt must have been assessed by the IRS at least 240 days before you file your bankruptcy petition, or must not have been assessed yet.

Certain events toll the time periods provided for above. If you have done any of the following, the time periods discussed above will have to be extended:

• OIC. You attempted to settle your debts by means of an “Offer in Compromise.” An offer in compromise delays the 240-day rule by the period from the time from when the offer is made until the IRS rejects it or you withdraw it, plus 30 days.
• TAO. You obtained a “Taxpayer Assistance Order” from the IRS ombudsman. If a TAO was issued preventing the IRS from collecting, the bankruptcy court may require that you add the same amount of time that the IRS’s collection was suspended.
• Prior Bankruptcy Case. If you filed for bankruptcy to prevent collection, you must add the time that your case was open to the applicable periods described above.

What you are considering to be “taxes” may, in fact, be a “penalty.” Penalties are not dischargeable. By way of example, if you owe money to the IRS due to a pass through penalty for your business’s failure to pay payroll and FICA withholding, those are deemed to be penalties and totally non-dischargeable per U.S. Supreme Court decision. The same goes for any fraud penalties; they can never be discharged in bankruptcy. You should contact your attorney regarding these obligations. Sometimes they can be dealt with through an Offer in Compromise. Obligations owing to the State of Michigan must be dealt with separately and remember that there is no formal offer in compromise procedure with the State of Michigan, so any settlement must be arranged with the Department of Treasury.

If you need copies of back tax returns, but do not want to have to pay the fees required by the IRS’s Form 4506, $57.00 per return, you can obtain a complete transcript of your returns for free by filing a Form 4506 T with the IRS. To find Form 4506T, go to www.irs.gov and type 4506T into the search box at the top of the page. On the form, ask for the returns to be sent to your home, either by mail or by fax, or to your attorney’s office.

What If The IRS Has Filed A Tax Liens Against My Property?
If you qualify for a discharge of your debts in a Chapter 7 bankruptcy it may wipe out only your personal obligation to pay the debt, but any lien recorded before you file for bankruptcy remains for ten (10) years. Usually, the debt has to be reported in your bankruptcy petition as a secured obligation. So even if the taxes qualify for and are discharged, the IRS’s lien is unaffected and the IRS can still take your property. In other words, if you want to keep your property, you still have to make arrangements with the IRS to pay them. If you fail to contact the IRS or, if your attorney does not do so, assuming you retain cousnel to represent you with respect to your tax issues, and file he or she files a Form 2848, the IRS may attempt to seize your property.
If you have non-dischargeable tax obligations you should strongly consider filing a Chapter 13 or Chapter 11 bankruptcy because the U.S. Bankruptcy Code allows you to include your tax obligations in the payment plans that are included in filings under those chapters.

Lastly, a few words of warning: If you are thinking about filing for protection under the U.S. Bankruptcy Code, file your income tax returns on time and file any delinquent returns ASAP! Timely filing may make the difference between discharge of the taxes and their non-dischargeablity. Also, many trustees will not conduct §341 meetings without copies of current returns. In effect, your tax returns become the “price of admission” to bankruptcy. If you have not filed them, get them filed now!

We wish you well. Remember we are just a call away. Contact us now at 248.546.2800

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For further information: Chapter 13 Bankruptcy
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