If you owe the IRS and State of Kansas taxes, read on to see how you may be able to discharge tax debts in Bankruptcy.
Discharge Tax Debts (Quick Version):
For tax debts to qualify for discharge in bankruptcy, they must meet these basic guidelines. This is often called the 3-2-240 rule:
- The 3-Year Rule – the tax debts are at least three years old. 11 U.S.C. §507(a)(8)(A)(i)
- The 2-Year Rule – your income tax returns must have been filed at least two years before you file your bankruptcy petition. 11 U.S.C. §523(a)(1)(b)(ii)
- The 240-Day Rule – taxes must have been assessed by IRS/KDOR at least 240 days before you file for bankruptcy under this rule or not assessed at all
- The taxes owed must be Income Taxes
- The tax return was not filed fraudulently
- A tax return was filed for the years owed
Discharge Tax Debts (Long Version):
The Bankruptcy Code’s treatment of unsecured tax claims joins the two concepts of priority and discharge, 11 U.S.C. §§ 507(a)(8) and 523(a)(1). Tax debts are broken down along three basic categories: (1) Some taxes are priority/nondischargeable – (2) Others are nonpriority/nondischargeable – (3) All the rest are nonpriority/dischargeable.
Priority / Nondischargeable Tax Debts:
The first type of unsecured tax debts includes: Taxes on returns where the due date of the return, counting extensions, is within 3 years of the bankruptcy filing date – Taxes assessed within 240 days of the filing date – Trust fund taxes, no matter the age – Taxes that have not been assessed but are still assessable
Nonpriority / Nondischargeable Tax Debts:
The second type of unsecured tax debts includes: Taxes on returns that have not been filed – Taxes on returns filed late within 2 years of the filing date – Taxes on fraudulent returns; or, taxes for years where the taxpayer willfully attempts in any manner to evade or defeat taxes that are due
Nonpriority / Dischargeable Tax Debts:
The third type of unsecured tax debts: If neither priority/nondischargeable nor nonpriority/nondischargeable, then the unsecured tax falls into the catchall of nonpriority/dischargeable
Discharge Tax Penalties and Interest:
Here is an easy way to keep this straight:
- if the tax debts are nondischargeable, then the interest on those tax debts are nondischargeable as well;
- if tax is dischargeable, then the interest on those taxes are dischargeable
- if less than 3-years old, penalties are nondischargeable;
- if more than 3-years old, penalties are discharged
240 Day Tax Assessment / Tax Transcript:
The first step in determining if your tax debts are dischargeable is to obtain a tax transcript – specifically an “account transcript” or “literal transcript”. The account transcript will show the due date, filing date, and assessment date, which are crucial in determining whether the taxes fit within the 3-2-240 rules. To order a transcript, see http://www.irs.gov/Individuals/Order-a-Transcript You can order the transcript online, by phone at 1-800-908-9946 FREE, or by using IRS Form 4506T. The request will take up to two weeks to process.
Some actions can add additional time to some or all of the above time requirements, including:
- making an offer in compromise: extends 240-day rule and adds 30 days – 11 U.S.C. §507(a)(8)(A)(ii)(I)
- having filed for bankruptcy previously: extends 3-year rule plus 90 days, 240-day rule plus 180 days, and 2-year rule with no additional time 11 U.S.C. §507(a)(8)(A)(ii)(II)
- obtaining a taxpayer assistance order §507(a)(8)(A)(i).
- collection due process hearing extends 3-year rule and 240-day rule and adds 90 days – 11 U.S.C. §507(a)(8)
The time periods under the 3-2-240 rules are tolled (suspended) while any of these events are pending. However, simply entering into a payment arrangement with the IRS does not toll the time periods under the 3-2-240 rules.
To Learn More About Discharging Tax Debts in Chapter 7 or 13 Bankruptcy, Call email us now.Chris W. Steffens, a Kansas Licensed Bankruptcy Lawyer or you can