Discharging Taxes in Bankruptcy

Taxes & Bankruptcy

Discharging Taxes and Tax Debts in Bankruptcy

Personal Income Taxes

Contrary to popular belief, you may be able to discharge taxes in bankruptcy. The rules governing income taxes are spelled out in the bankruptcy code under 11 USC 523. To be dischargeable the taxes must have been due at least 3 years ago. So, if filing on April 16, 2012, you may potentially discharge 2008 taxes and prior.

Further, the taxes must have been filed at least 2 years ago. And by filed I mean that you or your CPA filed them, not the IRS or state tax commission. If they filed them then you will not be able to discharge them unless you, if not too late, file an amended return and wait the two years out.

The third requirement related to discharging personal income taxes due is that the assessment must not have come within the past 240 days. This rule is the most tricky one because many factors come into play here. Say for example you are audited and are hit with an assessment and you appeal that assessment. In that case the 240 days do not start running until after the appeal is concluded and you are assessed. Additionally, if you submit an offer in compromise, the 240 days do not run during the time the IRS is considering your offer. Moreoever, once the offer in compromise is decided you have to wait an additional 30 days on top of the 240 days before the tax liability is dischargeable.

Last, but not least, if you are found to have filed a fraudulent return or willfully attempted in any manner to evade or defeat the taxes owed your tax liability will not be discharged regardless of the above factors.

Tax Liens

Keep in mind that even if you are able to discharge a tax debt as described above, if you already have a tax lien against your property or other asset, that lien is not going to go away by filing bankruptcy; even if you are able to discharge the underlying tax liability. I can talk to you about this if it applies and, perhaps, work out some arrangement to have that lien lifted before you file. However, even if you do have the tax lien remaining on your property, the lien will go away after 10 years.

Property Taxes

Any property taxes are dischargeable after one year from when a penalty begins accruing. The same caveat stated above in regards to tax liens applies here. However, keep in mind that you will be able to repay the property taxes (and income taxes above for that matter) interest and penalty-free on your terms and once they are paid the liens will be removed.

Will the IRS Take My House If I Have a Tax Lien?

Yes they can but it is rare. The last thing the IRS wants to do is go to the trouble of taking and selling your house. They would much rather go after low-hanging fruit like wage garnishments or bank account levies. But, if you have substantial equity in your house, take steps now to plan for a way to deal with the problem. Your tax problems will not go away by themselves. I have effective ways to deal with the IRS and/or the Oklahoma Tax Commission.

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