Bankruptcy: Discharging Income Taxes

One of the first things new bankruptcy attorneys learn is that some debts cannot be discharged. These debts are student loans, child support, and incomes taxes. However, eventually we discover that there are exceptions to the rules regarding nondischargeability. One exception is that income tax liability can be discharged under very specific circumstances.

First, income taxes can only be discharged in Chapter 7 bankruptcy. In Chapter 13 bankruptcy cases income taxes must be paid. Second, the taxes must not have been incurred as a result of income that was or should have been listed on a return due within the three year period prior to filing bankruptcy. This time period will be tolled if the debtor requested an extension of time to file their return. Third, the taxes must not have been assessed by the IRS within the 240 day period before the date the bankruptcy case was filed. Fourth, tax debt will not be discharged if the debtor failed to file a tax return or the return was filed within the last two years. Fifth, income tax liability that was the result of a fraudulent return or that the debtor attempted to avoid paying will not be discharged.

Income taxes may be dischargeable in bankruptcy, but as you can see it is limited to a very small group of debtors with very specific circumstances. In fact, out of over two thousand cases in which I represented clients in bankruptcy I have only discharged income taxes on four occasions, but in those four instances the benefit to my clients was substantial.