Tax debts can be discharged! – sometimes

A common misconception floating about is that income tax debts can never be discharged. This myth arises from the reality that income tax debts have a favored position in the bankruptcy code. Also, trying to figure out which tax debts are discharged can be mind boggling even for attorneys. Frankly the entire bankruptcy code can be mind boggling since most provisions relate back to other provisions that one must read before the original provisional can be understood.

Plain English is a foreign concept to drafters of legislation. All that aside, to determine if your income tax debt can be discharged, start at 11 U.S.C. Section 523(1). Section 523(1) immediately directs you to to two other provisions. The pertinent one here being 11 U.S.C. Section 507(a)(8). Section 507(a)(8) then circles you back into Section 523 making for a dizzying ride. You are welcome to go to these statutes and read them for yourself. If you understand them, you are either a bankruptcy attorney or you missed your calling.

Let me break it down for you with a plain English translation. In order for an income tax debt to be discharged, all these requirements must be satisfied:
1) The tax return filing must have been due more than three years before you file your bankruptcy petition. If an extension was filed, then that moved the due date for your filing out so extension periods do not count towards that three years.
2) The taxes were either officially assessed more than 240 days prior to the bankruptcy petition or were not yet assessed but were assessable. I know, that last part does not seem to be in the statute but that is because of how this statute is worded. It is listing what tax debts are excluded from discharge as those assessed within 240 days of filing, so those not assessed or assessed (but assessable) outside of the 240 days are not excluded. Offers in compromise and stays in other proceedings toll this time period plus add on 30 or 90 days respectively.
3) A tax return had to have been filed.
4) If it was filed after the final due date, including extensions (filed late), it had to have been filed at least two years before the bankruptcy petition is filed.
5) There can be no fraud or attempts at evasion of the tax at any time.

In order to know calculate these items precisely, one must obtain a tax Account Transcript from the IRS. This can be obtained by filing a Form 4506T from your friendly Internal Revenue Service agency.

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