Well it is mid-April again. Baseball season is ramping up, the kids see an end in sight to their school year, and it is time to file your taxes. Not surprisingly, this is the least favorite time of the year for many. Every year around this time I get calls, emails, and walk-in’s wondering the same thing, “hey, can I file bankruptcy and make my taxes go away?” I’ve found that most people just assume that the answer is “no.” For those of you that consistently read my blog articles, I am sure you know the answer to that question before I even type it. As is so often the case in the law, the answer is “maybe.”
The Three Rules
In order to get rid of your personal income taxes, there is a three rule test that is applied. You must satisfy all three rules to pass the test, and have your income tax discharged.
Rule #1: Your taxes must have been due at least three years before you file your bankruptcy. Let’s say your 2015 taxes are due on April 18, 2016 (1). EXAMPLE: The earliest you could file to wipe out 2015 tax obligation would be on April 19, 2019. Keep in mind that filing for an extension also extends the time limit to three years from when the extension was due.
Rule #2: Your taxes must have been filed at least two years before you file your bankruptcy. EXAMPLE: Let’s say your 2010 taxes were due on April 15, 2011, but you held off on filing them until April 15, 2015. The earliest you could wipe them out would be April 16, 2017.
Rule #3: The taxes must have been assessed by the IRS at least 240 days before you file bankruptcy or not assessed at all (3). This third rule comes into play where taxes may have been assessed at one figure, but later were changed to another figure, such as in the case of an audit or an amended return. EXAMPLE: Ok let’s say you have a tax obligation from 2009. You filed your tax return on April 15, 2010. You’ve met the first two prongs of the test. BUT, what if you gave it some thought and decided to amend your return to show less income than you originally filed? Ok, then you have to wait 240 days from the amendment.
What Else Should I Know?
Keep in mind that a bankruptcy can only be used to discharge personal income taxes. If you owe payroll taxes or fraud penalties, those are not dischargeable. It is important to know that the IRS will often put a tax lien on your property if you owe back taxes. While you may be able to get rid of your personal obligation to pay your back taxes through a bankruptcy, you cannot get rid of the tax lien. That stays in place until the property is sold. It is crucial that you go see a bankruptcy attorney regarding your tax situation BEFORE the IRS puts a lien on your house. The good news is that you do not need to completely understand the Bankruptcy Code or the Three Rule Test to find out if your tax obligations are dischargeable. You can call Berkowitz & Myer today to set up a free consultation. It costs you nothing to find out your rights.