Income tax debt is one of the reasons many people file for bankruptcy relief. However, most income tax debt is non-dischargeable meaning you cannot get rid of the debt by filing a bankruptcy case. However, in some cases, income tax debt is dischargeable in a bankruptcy case, even in a Chapter 7 bankruptcy case.
Discharging income tax debt in bankruptcy is a complicated undertaking. The rules governing a discharge of tax debt can be confusing. Before you attempt to get rid of your tax debt by filing bankruptcy, consult with an experienced professional who understands the Bankruptcy Code, bankruptcy rules, and case law.
How Can I Discharge Income Tax Debt in Bankruptcy?
To discharge tax debt in bankruptcy, you must meet three requirements commonly referred to as the “3-2-240” rule. If your tax debt does not meet all three requirements, you cannot discharge the debt in a bankruptcy filing. Let’s break down the 3-2-240 rule to understand the details of each rule better.
- 3-Year Rule
Under the 3-year rule, income taxes must be at least three years old to be eligible for discharge in bankruptcy. For most cases, the three years begin on the date the income taxes were due. However, it can become complicated to calculate the 3-year rule if you were granted an extension to file your tax returns.
- 2-Year Rule
The 2-year rule refers to the date your tax return was filed. The tax return that generated the income tax debt must have been filed at least two years prior to the filing of your bankruptcy petition to be eligible for discharge. Failing to file a tax return of if the IRS filed the tax return for you, you won’t be able to discharge the income taxes in a bankruptcy case.
- 240-Day Rule
The final rule for discharging income taxes in bankruptcy is the requirement for taxes to be assessed at least 240 days prior to the date of the bankruptcy filing. This date can also be difficult to determine. In many cases, the date of assessment will be close to the date you filed your tax return. However, if your tax return was audited, you disputed the taxes, or you filed a corrected tax return, the date you use to being the 240-day rule can change.
If your income taxes meet all the requirements under each of the above three rules, you may be able to get rid of your income tax debt in a Chapter 7 case.
What If I Cannot Discharge Income Taxes in a Chapter 7 Bankruptcy Case?
If you do not meet all three of the above rules, you may still be able to file a Chapter 13 bankruptcy case. In a Chapter 13 case, your income taxes will be paid through the bankruptcy plan. A bankruptcy plan allows you to spread out the income taxes over a 5-year plan.
Filing a Chapter 13 bankruptcy case also prevents collection efforts. It avoids having a tax lien placed against your property for the income tax debt. The protection of the Chapter 13 bankruptcy case also stops the IRS or state tax entity from seizing your assets, including your bank account, or filing a wage garnishment.
If you owe income tax debt, filing bankruptcy may the best way to solve your tax problem. Seek professional assistance to learn more about your options and the pros and cons of filing a bankruptcy case.