Everyone wants to know… “Can I discharge my back taxes?” Income tax debts are a source for confusion among bankruptcy professionals and debtors alike. It’s a very important question, but not the only question. In order to determine whether or not your income tax debt, and the penalties and interest on that debt are dischargeable, you first have to get out a calendar, a copy of the tax returns or tax transcripts for the tax years for which the taxes were assessed, then for each tax year assessed, you must answer the following questions:
- Was a tax return filed timely, including any extension periods?
- What date was the return filed?
- What date did the IRS “assess” the tax?
- What date is the Bankruptcy Petition filed, or to be filed?
Dischargeability of Tax Claims
In summary, in a Chapter 7 or Chapter 13 proceeding, a tax debt is dischargeable if all of the following are true as of the filing date:
- A tax return was filed for the tax year in question. If you didn’t file a tax return, the taxes cannot be discharged;
- The tax return was “due,” including extensions, more than three years ago. If your tax became due within 3 years of the date of filing, they are not discharged;
- The tax return must have been timely filed. If the return is filed late and within 2 years before the date of the petition, the taxes will not be discharged.
- The IRS assessed the tax more than 240 days ago; and
- Honesty matters. The debtor must have filed the return in good faith. If the taxpayer commits civil or criminal fraud or if the taxpayer willfully tried to evade or defeat the payment of the tax the taxes will not be discharged. This includes failing to file a timely return or filing a return only after the IRS conducts an investigation and assesses a tax.
Tax Claims in Chapter 13
The issue whether or not a Tax is dischargeable is only part of the question in a Chapter 13 case. Even if fully dischargeable, tax claims may be entitled to priority status and priority claims must be paid in full during the term of a Chapter 13 repayment plan. This can cause the plan to fail. The following taxes are entitled to priority status:
- Taxes for which a tax return was originally due within three years of the filing of the bankruptcy;
- Taxes that were assessed within 240 days of filing; and
- Taxes that were assessable but were not assessed at the time of filing.
Taxes are complicated. You need help. If you have income tax debts and are considering filing a bankruptcy, consult with the attorneys at Resnick & Moss, P.C., at (248) 642-5400, who with careful planning may be able to help you to eliminate all or a portion of your tax debt with a bankruptcy plan.