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FORGIVENESS OF PERSONAL INCOME TAXES IN BANKRUPTCY
To be relieved of unpaid taxes by a bankruptcy filing the taxpayer must show the bankruptcy court that they have met the five rules(or tests) for a discharge of taxes in bankruptcy. These rules are:
1. The three-year rule
The tax year in question must be over three years old, dated from the time the return was due, not the end of the particular tax year. So 2008 taxes will first be eligible for forgiveness on April 16, 2011 or three years from the extension date should an extension have been granted.
2. The two-year rule
The tax return must have been filed two years before the bankruptcy. If you did not file or you just filed you are not eligible to forgive the tax.
3. The 240-day rule
The tax must have been assessed for more then 240 days. For instance, If you just received a notice today IRS added taxes to your tax form from your return four years ago or more likely, as clients have been telling us, New York State just went back over your old tax returns you need to let them try to collect for the next eight months.
4. The non-fraudulent return rule
Simply means that the tax return must not be fraudulent. For example, you failed to report an income.
5. The non-tax evasion rule
You must not have been found guilty of a willful attempt to evade or defeat the tax. Example- you hid your assets or transferred them to another person.
If you satisfy the above conditions then your income taxes can be discharges in a bankruptcy.
Not All Tax Claims May be Discharged
Certain tax claims are not subject to a discharge. These are what are called fiduciary claims. Very simply stated- these are taxes collected by the tax payers from other parties. For example the withholding taxes from employee pay checks held by the employer. The employer may not discharge the employee taxes not paid over to the government.
Learn More From a Bankruptcy Attorney
If you would like to learn more about income tax discharges in bankruptcy, don't hesitate to call our law office to contact an experienced bankruptcy lawyer.