Can Bankruptcy Eliminate Past-Due Taxes?

Can Bankruptcy Eliminate Past-Due Taxes?

Yes, bankruptcy can eliminate, or discharge, some taxes. However, some taxes are never dischargeable. The differences between taxes that are dischargeable and those that are non-dischargeable depend on a couple of factors.


What Taxes Are Never Dischargeable?

Taxes that are considered "Trust Fund" taxes are never dischargeable and generally never go away. Trust Fund taxes are monies withheld from employee paychecks for income tax, Medicare, and social security. These monies are held in trust by the employer until forwarded to a taxing authority such as the IRS. The only legal way to not pay such taxes is to have the taxing authority determine that the taxpayer is uncollectible. This determination is quite complex and beyond the scope of this article. If you wish to find out if you can qualify as "uncollectible" by the taxing authorities, you will need to contact an Enrolled Agent to help you. An Enrolled Agent is specially trained to deal with this issue and is best suited to handle it. Generally, CPAs and other tax professionals are not qualified to deal with this issue and lack the requisite skill and training to handle it properly. You can call the Orange County Bankruptcy Attorney at (949) 954-7568 for a referral to a qualified Enrolled Agent in your area.


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:

  1. 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.

  2. 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.

  3. 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.

  4. 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.

  5. 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.


What Events Can Increase the Amount of Time that Has to Pass?

There are events called "Tolling Events" that stop the clock, or increase the time that must be satisfied before the rule is satisfied For example, if the taxpayer has filed an "Offer in Compromise" with the IRS, this action stops the clock completely. Prior bankruptcy filings are also events that stop the clock. In order to determine whether the proper time has passed, such "Tolling Events" must be carefully reviewed in order to properly determine the amount of time that has elapsed for the rule to be satisfied.

If You Have More Questions


Please contact us if you have more questions or are ready to move forward and start the process of becoming debt-free. Remember, we are here to help you resolve your debt problems, so call us now!

(949) 954-7568