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Most people do not realize that taxes can be discharged in a bankruptcy. Regular income taxes, if they meet certain requirements, are dischargeable. Employer paid payroll taxes and unemployment taxes, however, are not. Even if the taxes are not dischargeable, you can always file a Chapter 13 case, to make a plan to repay the taxes, if the IRS or Maine Revenue services is not working with you.
Five Rules to Discharge Tax Debts
If the income tax debt meets all five of these rules, then the tax debt is dischargeable in Chapter 7 and Chapter 13 bankruptcy petitions.
- The due date for filing a tax return is at least three years ago.
- The tax return was filed at least two years ago.
- The tax assessment is at least 240 days old.
- The tax return was not fraudulent.
- The taxpayer is not guilty of tax evasion.
Return Due At Least Three Years Ago
The tax debt must be related to a tax return that was due at least three years before the taxpayer files for bankruptcy. The due date includes any extensions.
Return Filed At Least Two Years Ago (Chapter 7 only)
The tax debt must be related to a tax return that was filed at least two years before the taxpayer files for bankruptcy. The time is measured from the date the taxpayer actually filed the return.
Tax Assessment At Least 240 Days Old
The IRS must assess the tax at least 240 days before the taxpayer files for bankruptcy. The IRS assessment may arise from a self-reported balance due, an IRS final determination in an audit, or an IRS proposed assessment which has become final.
Tax Return was Not Fraudulent
The tax return cannot be fraudulent or frivolous. Taxpayer Not Guilty of Tax Evasion The taxpayer cannot be guilty of any intentional act of evading the tax laws.
Some Tax Debts Not Dischargeable
Tax debts that arise from unfiled tax returns are not dischargeable. The IRS routinely assesses tax on unfiled returns. These tax liabilities cannot be discharged unless the taxpayer files a tax return for the year in question.
Other Tax Issues in Bankruptcy Before a Chapter 7 or Chapter 13 bankruptcy can be granted
The bankruptcy petitioner may be required to prove that the four previous tax returns have been filed with the IRS. The four previous tax returns must be filed no later than the date of the first creditors’ meeting in a bankruptcy case.
Additionally, bankruptcy petitioners are required to provide a copy of their most recent tax return to the bankruptcy court, assuming they are required to file tax returns. Creditors can also request a copy of the tax return, and petitioners must provide a copy to them.
If the IRS has filed a lien on your real estate, this lien does not go away, even if the taxes are discharged.
The IRS can declare a taxpayer “currently not collectible,” after the IRS receives evidence that a taxpayer has no ability to pay. Such evidence is usually obtained from the taxpayer on IRS Form 433-F, Collection Information Statement. A taxpayer can request “currently not collectible” status by submitting Form 433-F to an IRS Revenue Officer or the IRS Automated Collection System unit.
Once the IRS declares a taxpayer currently not collectible, the IRS must stop all collection activities, including levies and garnishments. The IRS must send an annual statement to the taxpayer stating the amount of tax still owed. This annual statement is not a bill.
While in not collectible status, the 10-year statute of limitations on tax debt collection is still running. If the IRS cannot collect the tax within the 10-year statutory period, then the tax debts will expire.