Taxes In Bankruptcy

Many people are unaware that you can include taxes in bankruptcy.  You cannot always include your taxes in bankruptcy.  Treatment of taxes in bankruptcy depends on when and how the taxes were incurred.  In most cases, if you wait the requisite amount of time, you can file bankruptcy on taxes.  Timing is critical, as explained below.  A San Diego bankruptcy lawyer can advise you as to when to file your case so that you can include your taxes in bankruptcy.

Can I Include Taxes In Bankruptcy in San Diego?

Whether you can include your taxes in bankruptcy in San Diego, usually turns on how old the taxes are (older taxes can usually be discharged) and on what type of taxes you owe.  If your taxes are older taxes, and you have acted in good faith, you can usually file a Chapter 7 or Chapter 13 case and discharge (eliminate) your tax debt. Understanding when and how income taxes or other taxes can be discharged in bankruptcy can play a key role in you and your lawyer's strategy employed in planning for bankruptcy.

Income Tax Discharge Rule

Income taxes in bankruptcy can be discharged (eliminated) if on the date that you file:

         3 years has passed since the tax was due, including extensions.  
         2 years has passed since you filed your tax return for the relevant year.  
         240 days has passed since assessment (if an assessment has been made).

The 3-year period starts from when your tax returns were due, including any extension.  If you obtained an extension, then the 3-year period starts after the end of the extension period. The 2-year period requires that you file your return, then wait 2 years before you file bankruptcy. The 240-day period requires that 240 days pass from the time of "assessment" by the IRS. The IRS must generally make an assessment within 3 years of the date that you filed your tax return for a given year. However, the IRS doesn’t always make an assessment within 3 years and there is always the possibility that the IRS will allege fraud in which case the IRS can assess taxes long after the 3 years have passed.

Property Tax Discharge Rule

Property taxes in bankruptcy can be discharged (eliminated) if on the date that you file: 1 year has passed since the tax was first due.  The 1-year period starts from the day the property taxes are first due without penalty.

Employment Tax Discharge Rule

Employment taxes in bankruptcy can be discharged (eliminated) if on the date that you file:

         3 years has passed since the tax was due, including extensions. 
         2 years has passed since you filed a tax report for the relevant period.                 

The 3-year period starts from when your employment taxes were due, including extensions.  If you obtained an extension to file employment taxes, then the 3 year period does not begin to run until the end of the extension period. The 2-year rule requires that you file your return, then wait 2 years before you file.

What Constitutes Filing Taxes?

Frequently, if you have not filed your taxes, the tax authorities will your tax return or tax report for you.  This does not constitute you filing your tax return or report. The 2-year rule, applicable to both income tax discharge and employment tax discharge, requires that you, yourself, have filed your income tax return or employment tax report. To meet the 2-year rule applicable to discharge of income taxes and employment taxes, you have to actually file your own return or report before you file bankruptcy and then wait out the 2-year period. 

Tax Fraud or Tax Evasion

Bankruptcy and taxes sometimes raise the issue of tax fraud.  If you have committed any tax fraud in connection with the filing of your return, then your attorney will advise you that you cannot discharge your taxes in bankruptcy, if the IRS objects to your discharge on the grounds of fraud.  Long overdue taxes and bankruptcy can sometimes raise the issue of tax evasion.  If you have engaged in intentional tax evasion, the IRS can oppose your discharge on the ground of tax evasion.  Bankruptcy affords only the honest debtor an opportunity to get out of debt and get a fresh financial start.