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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