A debtor may discharge taxes in bankruptcy under certain conditions. Bankruptcy can discharge some income taxes. Taxes such as payroll taxes, sales taxes, or property taxes are not dischargeable. Discharging taxes in bankruptcy is possible by meeting specific criteria and following certain procedures.
What are the criteria for discharging income taxes in bankruptcy?
The criteria for discharging income taxes in bankruptcy are commonly known as the 3-2-240 rules. These rules state that you can discharge income taxes that:
- Became due at least three years before you filed for bankruptcy;
- Were filed at least two years before you filed for bankruptcy; and
- Were assessed at least 240 days before you filed for bankruptcy.
These rules apply to federal, state and local income taxes. However, there are some exceptions and complications that may affect your ability to discharge your taxes. For example, if you filed for an extension, got audited, or made an offer in compromise, the time periods may be extended or tolled. If you committed tax fraud or evasion, it may not be possible to discharge income taxes at all. Therefore, it is important to consult with a qualified Arizona bankruptcy attorney who can determine if your taxes are dischargeable.
What are the procedures for discharging income taxes in bankruptcy?
The procedures for discharging income taxes in bankruptcy depend on the type of bankruptcy you file. There are two main types of bankruptcy for individuals: Chapter 7 and Chapter 13.
Chapter 7 bankruptcy is a liquidation bankruptcy. A Chapter 7 trustee sells your non-exempt assets and distributes the proceeds to your creditors. Chapter 7 can discharge your income taxes if they meet the 3-2-240 rules, as well as other general requirements. Chapter 7 cannot discharge a tax lien, which is a claim that a taxing authority has on your property. With a tax lien, the IRS can still seize your property to satisfy the tax debt.
Chapter 13 bankruptcy is a reorganization bankruptcy. A debtor’s Chapter 13 plan proposes to repay some or all of your debts over three to five years. Chapter 13 can also discharge your income taxes if they meet the 3-2-240 rules, as well as other requirements. However, Chapter 13 bankruptcy has some advantages over Chapter 7. For example, Chapter 13 can help you pay off your non-dischargeable taxes over time, without interest or penalties. Chapter 13 bankruptcy can also help you remove a tax lien from your property if you pay certain amounts based on the value of your property.
To discharge your income taxes in bankruptcy, you have to follow certain steps, such as:
- Obtaining tax account transcripts from the IRS for the years taxes have gone unpaid;
- Filing all your required tax returns ;
- Listing the IRS and other taxing authorities as creditors in your bankruptcy petition and schedules; and
- Completing your bankruptcy case and receiving a discharge order from the court.
These steps may vary depending on your specific situation and the type of bankruptcy you file. Therefore, it is advisable to work with an Arizona bankruptcy attorney who can guide you through the process.