By Kitty J. Lin
What happens if you owe taxes and you need to file for bankruptcy? Are taxes dischargeable in bankruptcy? Taxes can be discharged depending upon the circumstances. The general rule is that if prior to filing bankruptcy the taxes are due more than three (3) years ago, or the return was filed more than two (2) years ago, and the taxes are assessed more than 240 days prior to the filing of your bankruptcy case (assuming the taxes were not filed fraudulently) should be dischargeable in your current bankruptcy case.
Like any tax law there are some limitations and exceptions to this general rule. Make sure the bankruptcy lawyers you seek counsel from obtain your tax transcript from the Internal Revenue Service. There are certain activities that may stop the clock from ticking and therefore may keep you from getting that discharge in your bankruptcy case. These activities that stop the clock are called “tolling provisions.”
Assessed 240 Days Prior to Filing Bankruptcy
One of the tolling provisions is if there is a pending Offer in Compromise with the taxing authorities. The time that the Offer in Compromise is in consideration stops or “tolls” the 240 day assessment requirement plus an extra 30 days. That means that the tax will not be dischargeable until at least 270 days after it was assessed, including the time that the Offer in Compromise was on the table. If you were paying your taxes through an installment agreement you do not have to worry. The time you are in the installment agreement does not count against the time period for dischargeability of taxes. If you have filed a previous bankruptcy petition that prevents the collection of the taxes, so the 240 day assessment period is tolled and an additional 90 days is added on top of the 240 days.
Due More Than 3 Years Prior to Filing or Filed More Than 2 Years Ago
The three year rule includes any applicable extension periods. For example, if you owe taxes for 2001 tax year, the taxes are due April 15, 2002. These taxes will not be eligible for discharge until April 15, 2005 (3 years from the time the taxes are due). If the date the taxes are due falls on a weekend, then the taxes will be due the next business day. This may mean that taxes are sometimes due on April 16 or April 17. If you are provided with an extension then your taxes will not be due until October 15, 2002 and your taxes will not be dischargeable until October 15, 2005. A bankruptcy filing will also toll the three year rule.
However, it is very important to make a distinction of whether the bankruptcy filing actually stayed the collection of the taxes. If you filed a Chapter 13 bankruptcy case and owed taxes prior to filing the bankruptcy the taxes are included in the Chapter 13 plan. The taxing authority is therefore prevented from collecting against you. If the Chapter 13 case is dismissed for any reason and you file a subsequent bankruptcy you need to remember that the while the taxes were in the Chapter 13 plan the time is tolled. The time you are in the Chapter 13 is not added as part of the three years. If you filed a Chapter 13 bankruptcy case but for whatever reason your tax debts were NOT included in the Chapter 13 plan (for example, if you filed your bankruptcy case and then owed taxes for the years after the Chapter 13 plan was confirmed), the taxing authority was not prevented from collecting the taxes from you because the estate property revested in you upon confirmation of your Chapter 13 plan. See In re Jones, (No. 10-60000, 9th Circuit, 2011). You need to make sure you ask the bankruptcy lawyers in your jurisdiction about whether property of the estate revests in you the debtor. Different jurisdictions have different Chapter 13 plans and not all revest property of the bankruptcy estate in you the debtor upon plan confirmation.