Can income taxes be discharged in my NJ bankruptcy?

A:

One question I am often asked is whether people can get out from under an onerous tax burden by filing bankruptcy, either in a chapter 7 or a chapter 13.  Trust fund penalties aside for unremitted payroll tax deductions, it is possible to discharge (wipe out) income taxes under certain circumstances.  However, those circumstances are far from straightforward and should be reviewed with care by an attorney.

Until recently, if the income tax return of the debtor was due at least three years before the filing of the petition, was actually filed two years before the filing of the petition, and assessed at least 240 days before the filing of the petition, the tax was generally dischargeable.  The problem, though, is that the IRS has successfully challenged the two year prong of that rule at the trial court level.

In three cases, taxing agencies have successfully argued that a late filed return is not a "return" under the provision of the bankruptcy code dealing with the dischargeability of taxes because a late filed return does not satisfy all "applicable filing requirements" since filing on time is one such requirement.  In re Creekmore, 401 B.R. 748(Bankr.N.D.Miss.2008); Links v. U. S., 2009 WL 2966162 (Bkrtcy.N.D.Ohio); McCoy v. Mississippi State Tax Commission, 2009 WL 2835258 (Bkrtcy.S.D.Miss.).

For example, suppose you haven't paid all of the income taxes from tax year 2005, and the return for that year was filed on or before April 15, 2006.   This would generally be dischargeable.  However, what if the return for 2005 was not filed until much later, such as January of 2008?  It would have been filed more than two years ago, but arguably not "on time."  Here you would need to discuss this with an experienced bankruptcy attorney to see if discharging that tax is still possible.  On the other hand, if you have tax debt that fell due three years ago on a timely filed tax return, you may well be able to get out from under it by filing bankruptcy.

If you owe taxes to the IRS or New Jersey and are looking to see if bankruptcy can help you, please contact my office for a free consultation.

Have more questions about bankruptcy?  Get the answers to the most frequently asked questions by downloading my free book, Top Questions People Ask About Filing Bankruptcy in New Jersey.  It will give you the answers you need all in one place.  Then call me at 888-857-8418 or contact me through this site for an appointment for a free consultation to discuss your case.