There is a common misconception that income taxes cannot be discharged in a chapter 7 bankruptcy. Well, this is true regarding some income tax debt but not all. Income taxes may be discharged in bankruptcy if the following five criteria are met:
- The taxes must be more than three years old. The clock starts ticking the date the tax return is due, not when the return was filed. If the tax year in question is 2007, then the return would typically be due on April 15, 2008 and that is the date where you would start your analysis. Any extension filed delays the start time to the date the return was due under the extension;
- The tax return (or equivalent notice or report, if required) for the year in question must have been filed more than two years prior to the bankruptcy filing;
- The taxes must have been assessed by the Internal Revenue Service and the assessment must have occurred more than 240 days before the bankruptcy was filed;
- The tax return for the year in question cannot be fraudulent; and,
- The taxpayer has not engaged in any activity that was a willful measure to evade or defeat the tax.
One thing that is an absolute necessity is to obtain an Account Transcript from the IRS for each tax year in question. The Account Transcripts will help you determine if all five criteria are met and whether there were any tolling events. It's important to note that this list is just an outline. Each of the five rules has its own rules and conditions which come into play. Have an experienced bankruptcy attorney conduct the analysis and represent you throughout the bankruptcy process.