Generally, taxes cannot be discharged (eliminated) in a bankruptcy. However, personal income taxes (as opposed to corporate tax, sales tax, payroll tax, etc.), can be discharged if:
First. The date the tax return was due to be filed is more than 3 years before the bankruptcy is filed. The 3 year period starts when the return was due. For example, the 2019 return was due on April 15, 2020. Thus, the tax could be dischargeable by April 16, 2023. (However, if the Taxpayer obtained an extension to file, for example until October 15, 2020, the tax would not be dischargeable until October 16, 2023).
Second. The tax return was filed at least 2 years before the bankruptcy is filed.
Third. There was an assessment by the taxing agency (a statement that the taxes were owed), and
Fourth. The tax return is not fraudulent.
When taxes cannot be discharged, there may still be benefits to handling taxes through a bankruptcy. A bankruptcy filing will start the “automatic stay,” under which the taxing agency cannot use legal procedures to collect from the debtor. This could be beneficial if the taxing agency is threatening to seize bank accounts or business equipment and won’t take a payment plan.
Also, in a Chapter 13 or a Chapter 11, the debtor can force the taxing agency to take a payment plan without additional interest or penalties being added. With all of the payment going to principal rather than interest, the savings could be substantial.
For a free consultation regarding bankruptcy, alternatives to bankruptcy, divorce, or surviving lawsuits, call (213) 509-1515.