Surprising Facts About Income Tax Debt and Bankruptcy

I just finished an analysis of whether over $90,000.00 in income tax debt from 2003 to 2005 could be discharged for a client through bankruptcy. The surprise answer for them was that it would be discharged completely in a Chapter 7 or a Chapter 13. Many have the mistaken belief that income tax debt never goes away; even many attorneys assume you must pay it no matter how far behind you find yourself. The truth is, there is a series of time-based limits set on income tax debts and once those limits are reached, the tax is treated like any other unsecured debt in bankruptcy.

To know whether a tax debt can be discharged in bankruptcy, one must obtain an “Account Transcript” for each year in which tax debts are owed. This transcript has a series of three digit codes along with dates for those codes and sometimes dollar amounts listed. Certain codes matter more than other. For example, one must make sure there are no “320’s” because that indicates an assertion that there was fraud involved in the tax return filed. Then, one needs to ascertain the dates of any penalties assessed by scrutinizing codes 290, 294, 298, 300 and 304. These penalties are also subject to the time limits but have to be addressed separately due to different stating dates.

Another code that makes a huge difference is the “520” code.  A 520 event is one that may or may not cause a stand still (a “tolling”) of those time limits from running. Just finding the 520 code is not enough because one must CALL the Internal Revenue Service to find out what the “closing code” is. The closing code will be a “77” or a “90”.  The 77 closing code means the time between the 520 date and the following 521 or 522 closing date did toll the time making it take longer to be able to discharge the debt. There is also code “480” that happens when there is an “offer in compromise” proposed. A 480 event also tolls the time until the tax debt can be discharged.

If you have done your best to pay your income tax debt and it is just too big a burden, go a an attorney who can analyze a Tax Account Transcript. Find out if you can get a fresh start even from income tax debt.