Despite what many people may think, taxes may be dischargeable in bankruptcy. Oftentimes when I consult with someone, part of their financial difficulties stem from owing back taxes. They ask me this question, and I respond: it depends.
When Can They Be Wiped Out?
First of all, the taxes must be income taxes. Other taxes, such as payroll taxes or fraud penalties, can never be wiped out in bankruptcy.
Second of all, there cannot have been any fraud. If you filed a fraudulent tax return or otherwise willfully attempted to evade paying taxes, bankruptcy can't help.
After that, in order to be discharged (wiped out), three requirements must be met:
- The debt must be at least three years old. The tax must be one for which the return was last due (including extensions) at least three years before the filing of the bankruptcy. Therefore, if a 2005 income tax return was last due on April 15, 2008, the three-year requirement would be met after April 15, 2011. Certain events can "stop the clock," though. For example, if the IRS was barred from collecting the taxes due to a prior bankruptcy filing, or if they suspended collection activity because of an offer in compromise;
- You must have filed a tax return for that year at least two years before filing for bankruptcy. Our tax system is self- reporting, so you must have actually filed a tax return for the clock to begin to tick; and
- You pass the "240-day rule." This means that the taxes must have been assessed by the IRS at least 240 days before you file your bankruptcy petition, or must not have been assessed yet. This time limit may be extended if the IRS suspended collection activity because of an offer in compromise or a previous bankruptcy filing.
What If There's a Lien?
Even if you meet these criteria, and can discharge the debt, if the IRS has placed a lien on any of your assets, bankruptcy cannot lift it. It can wipe out your personal obligation to pay the debt, and prevent the IRS from going after your bank account or wages, but if they recorded a tax lien on your property before you file for bankruptcy, the lien will remain.
So What Do I Do?
If you are a southern New Jersey resident in financial difficulty due to a tax burden and are thinking about bankruptcy, please feel free to call me at 856-432-4113 or contact me through this site to schedule an appointment in my Woodbury office to discuss your options. Even if all of your taxes do not meet these criteria, some of the debt load may be reduced, thus making it easier to pay the remainder.
If you are looking for more information about bankruptcy, then download my free book,Top Questions People Ask About Filing Bankruptcy in New Jersey.