In addition to family law, I also practice bankruptcy. My primary bankruptcy area of practice is individual debtor rights. Recently, several people have asked me about the possibility of discharging their tax debt.
It is simply not true that you may never discharge your taxes in bankruptcy. It is true that you may not discharge most taxes in a bankruptcy. For example, you may not discharge employer withholding taxes (“941 taxes”), and you may not discharge tax lien on the your real estate (although your personal liability on the debt may be discharged, if it meets the requirements), principally county or city real property taxes. This makes a certain amount of sense. Our state and federal governments operate on tax revenue. Real estate taxes fund a large part of local government budgets. So when Congress adopts bankruptcy laws, it is very protective of government revenues.
The rules governing the discharge of tax debt are very technical, so very particular information about your tax filings is necessary in order to analyze a possible discharge of your tax debt. Your federal tax information is readily available by phone, mail or online. You may request a transcript by calling 1-800-908-9946 or by ordering by mail by using an IRS Form 4506-T (Request for Transcript of Tax Return) You want a “Tax Account Transcript.” You may find copy of the Form 4606-T at www.irs.gov.
REQUIREMENTS FOR DISCHARGE OF TAX DEBT
The taxes must be income-based. Income taxes are the only type of tax debt dischargeable in a Chapter 7 bankruptcy. The tax debt must be for federal or state income taxes or for taxes based upon gross receipts. Interest on dischargeable taxes is dischargeable if the initial tax meets the requirements for discharge, as does any interest that has accumulated. Penalties may be dischargeable even if the tax does not meet the standards required for discharge. Generally, if the event that gave rise to the tax penalty occurred more than 3 years before the filing of your bankruptcy case, then the penalty can be discharged in bankruptcy. To discharge tax debt, you must qualify under several provisions of the Bankruptcy Code.
Taxes must have been due three years ago. The taxes must arise from a tax return due (including all valid extensions) three or more years before you filed for bankruptcy. For example, if income taxes were owed on a 2008 income tax return for which extensions to file the return expired on October 15, 2009, the tax return due date test is satisfied if the bankruptcy petition is filed after October 15, 2012.
Taxes must have been filed on time or at least two years ago. The tax return must have been filed at least two years before filing the bankruptcy. The return must be properly signed, mailed, and sufficiently complete to constitute a tax return. For example, if an extension to file the 2008 return expired on October 15, 2009 and you filed the 2008 return on April 15, 2011, you will have satisfied the three year test but not the two year test. You must wait two years from April 15, 2011 to file your bankruptcy in order to discharge the tax year 2008 taxes. Federal taxes are deemed filed when you mailed them, if timely, or if they are late, then on the date the IRS received the return.
Taxes must have been assessed more than 240 days prior to filing bankruptcy. The tax authority must have assessed the tax against you at least 240 days before you filed for bankruptcy. The 240-day limit may be extended if the tax authority was forbidden by law from making the assessment, such as if you were in a prior bankruptcy or had made an offer in compromise to the IRS. Because the Bankruptcy Code does not define “assessment,” different courts have interpreted the event differently. The Ninth Circuit Court of Appeals Bankruptcy Appellate Panel (Arizona is in the Ninth Circuit) said that assessment is the “formal act of fixing a tax liability, and that this act comes after the calculation is completed but may be made before the amount is due and payable.” In re King, 122 B.R. 383 (9th Cir. BAP 1991).
There was no willful intent to evade taxes or fraud involved. The tax return must not be fraudulent or frivolous and you cannot have been found guilty of any intentional act of evading the tax laws. If you filed a joint return, the taxing authority must prove that both you and your spouse committed a fraudulent act related to the return or willfully attempted to evade the tax in order for the court to deny the discharge of the tax debt, if it is otherwise dischargeable. The legal definition of a fraudulent return is the same as that required for a civil fraud penalty pursuant to federal law.
These are the basic requirements to discharge a tax debt in bankruptcy. This can sometimes be a difficult issue. If you are facing this issue, you should seek the advice of a good CPA or bankruptcy attorney. Thomas Morton, Phoenix, Arizona bankruptcy attorney, is read yuo assist you with your Chapter 7 bankruptcy.