Contrary to popular belief, income taxes can be discharged at bankruptcy under certain circumstances. In fact, local, state, and federal income taxes can be discharged in Chapter 7, Chapter 11, and Chapter 13 bankruptcy, along with interest and penalty fees. Determining which taxes are dischargeable can be a bit more complex, which is why it is a good idea to consult with an attorney at Atlas Consumer Law
It may be possible to discharge a significant portion of your income tax debt in bankruptcy if it meets the 3-2-240 rule (3-year, 2-year, and 240-day rules):
- The 3-year rule states that owed income taxes must be due at least three years before seeking a discharge by filing for bankruptcy.
- Example: If Bob’s income taxes were due on April 15, 2015, the soonest he can file for bankruptcy is April 15, 2018.
- The 2-year rule states that tax returns must have been filed at least two years before filing a bankruptcy petition.
- Example: If Jim’s taxes are due on April 15, 2015, but did not file his tax forms until June 1, 2016, he cannot file for bankruptcy until June 1, 2018 (two years after filing and more than three years from the date they were due).
- Under the 240-day rule, taxes must be evaluated at least 240 days before filing for bankruptcy, or not at all.
- Example: If Janet filed her 2008 taxes on April 15, 2010 and later meets the requirements of the 3-2-240 rules on April 15, 2013, she can file for bankruptcy. However, if she files for a correction or the IRS assesses a new amount due to her error, the 240-clock will start over.
There are additional actions that may add time to the 3-2-240 requirements, including obtaining a taxpayer assistance order, having filed for bankruptcy previously, or making an offer in compromise. The required time periods under the rules are suspended (tolled) while any of the aforementioned actions are pending.
Keep in mind that successfully discharging income taxes in bankruptcy will not automatically eliminate a tax lien, but there are fortunately options for dealing with this situation after bankruptcy. It is also worth mentioning that deliberate tax evasion and fraud are circumstances which will make the taxpayer ineligible for a discharge.
This is just a brief overview of what is a rather large and complex set of rules. To discuss your unique situation with a Chicago bankruptcy lawyer, please set up a consultation by calling (312) 313-1613.