What Taxes Can Be Discharged in Bankruptcy?
This article provides only a general outline of the rules of discharging taxes in bankruptcy. Do not rely on this article to make the determination of whether a tax is dischargeable or not as this is only a general outline and there are many more rules that must be satisfied before a tax may be discharged in bankruptcy. However, if the tax under consideration satisfies the rules outlined below, then there is a good chance that the tax is dischargeable in bankruptcy and it is worthwhile to sit down with an experienced attorney to discuss the situation.
In order for a tax that is not a Trust Fund tax to be dischargeable in bankruptcy, the tax must satisfy the following 5 basic rules:
- A Tax Return Must Have Been Filed By the Taxpayer
Most of the rules that determine the dischargeability of a tax start with the date the taxpayer filed the tax return. If the taxpayer has not filed a return, then the tax is not dischargeable as the time requirements will not be met. This will be more easily understood after reading the information below.
- A Tax Must Have Been Assessed
Just like the first rule, if no tax has been assessed, then the tax will not satisfy certain time requirements and will not be eligible for discharge in bankruptcy.
- The Three Year Rule
The "Three Year Rule" requires that three years must have passed from the most recent due date of the tax. For example, income taxes are due on April 15 of the following year, unless extension requests have been filed. If an extension was filed, then the due date is the date of the extension. When calculating the date, remember that if the date falls on a weekend or a holiday, the due date is the next regular weekday. The first extension due date is August 15 and the second extension is October 15.
- The 240 Day Rule
The 240 Day Rule requires that 240 days have passed after the last date of any assessment of tax. Each assessment triggers a new 240 day period that must pass before the tax qualifies for discharge.
- The Two Year Rule
The Two Year Rule requires that 2 years have passed from the date the taxpayer filed a return. The rules of what is considered to be a tax return are quite complex. Sometimes, a taxpayer will file a document that is not a typical tax return but that can be considered a tax return. For example, an "Agreed Audi" will, in many jurisdictions count as a tax return. The most simple situation to review is where the taxpayer filed the required tax return. Even if the return was filed late, this will still start the clock for the 2 Year Rule.