Can Taxes Be Discharged in Bankruptcy? – San Diego Bankruptcy Attorney
With tax season just winding up, I thought it would be a good idea to briefly discuss a question I get time and time again from our bankruptcy clients – can taxes be discharged in bankruptcy?
To begin with, certain taxes are NEVER dischargeable. There are 2 types of these taxes (called Priority Taxes):
- Taxes which were due within 3 years of filing the bankruptcy case, and
- Taxes that were assessed within 240 days of the filing of the case.
1. Recent Taxes
For the first type of priority tax, keep in mind that the date to start the tolling back is the date that the taxes were due. Thus, if someone was paying taxes for 2007, those taxes were due April 15, 2008. Thus, they cannot be discharged unless one files after April 15, 2011.
2. Recently Assessed Taxes
The second type of priority tax above typically deals with the situation where taxes were filed late and then assessed after the due date.
If the taxes pass the test above and are not Priority, there is the additional requirement that the tax returns must have been filed on time or at least 2 years before the filing of the bankruptcy case. Let’s say that taxes were due in 2005 and not filed timely, but were filed in 2007. That would be dischargeable today because although not filed on time, the taxes were filed at least 2 years before the filing of the case.
Lastly, there are the requirements that the tax return was not fraudulent or frivolous and the taxpayer was not guilty of intentionally evading tax laws.
So for purposes of simplification, the best way to understand the issue is to look at it in 3 steps:
Step 1 – Are the taxes Priority taxes?
Step 2 – If the taxes are not Priority, do they meet the second requirement, i.e. that they were filed on time or at least 2 years before the filing of the case.
Step 3 – if the above requirements are met, was the tax return fraudulent or frivolous, or was the taxpayer guilty of intentionally evading tax laws?
Filing an Adversary Proceeding to Discharge Tax Debt
Most attorneys charge an additional fee for discharging taxes in a consumer bankruptcy petition, as doing so requires the filing of another suit within the bankruptcy case, called an adversary proceeding.
We are familiar with the process for discharging taxes at my firm and regularly inform our clients that we can do so if the above requirements are met.