Income taxes can only be erased in Chapter 7 and Chapter 13 bankruptcies, if each of the following rules are satisfied:
- The income tax must have been due over 3 years before the bankruptcy was filed.
Income taxes are due April 15th the year after the tax year. Income tax debt from 2009 (due April 15, 2010) can be discharged in a bankruptcy filed after April 15, 2013. However, if an extension to file the return was requested, the 2009 tax wasn't due until October 15th, 2010. The bankruptcy filer would then have to wait until October 16, 2013 to erase the 2009 tax debt.
- The tax return must actually have been filed at least 2 years prior to filing the bankruptcy.
If the 2009 tax return wasn't filed until June 1, 2011, the bankruptcy filer would then have to wait until June 2, 2013 to erase the 2009 tax debt.
- The tax had been "assessed" by the IRS for at least 240 days before the bankruptcy is filed.
When the IRS audits a tax return and determines that additional taxes are owed, the bankruptcy must wait until 240 days after the audit to erase the additional tax, interest, and penalty.
- The tax return must have been "non-fraudulent" and the taxpayer must not have engaged in a willful attempt to evade or defeat the tax.
If the taxpayer lied on the tax return by purposely failing to report income or claiming a deduction (s)he clearly wasn't entitled to, the bankruptcy will not erase the additional tax.
As you can see, as long as the bankruptcy is not filed too soon after the tax return is filed, income taxes can be discharged. This is known as the "Gallo rule" for filing bankruptcy: Just as Ernest and Julio Gallo warn not to drink any wine before it is time, neither should the debtor owing income tax debt file the bankruptcy before the right time.
Sometimes people cannot remember when they filed their tax return or whether an extension was obtained. This information can be obtained from a tax transcript by filing IRS Form 4506 and Nebraska Tax Form 23. Debtors with income tax debt should always obtain the tax transcript for the tax year in question to determine the right time to file the bankruptcy.
Discharging income taxes in bankruptcy can be a tricky matter, and several traps exist to surprise the inexperienced. If you have any questions about discharging your tax liability in bankruptcy, please contact the Nebraska bankruptcy lawyers and staff at the Steffens Law Office. We have over fifty years combined experience in the field of debtor/creditor law, and we can help you get your life back.