Income Taxes and Bankruptcy

Author: Dustin Wetton

Ben Franklin once said that “the only things certain in life are death and taxes.” This quote can have many innuendos, one of which is that there is no way of getting out of paying for your taxes. However, during Mr. Franklin’s life, the United States had not yet setup a bankruptcy court or bankruptcy code. Thus, he was unaware of the ability to discharge federal and state income taxes through the bankruptcy process.

The bankruptcy code was initiated to help ease the burden of over-encompassing debt on debtors and to help create and protect the flow of credit. While most creditors are often credit-card companies, health industries, and lawsuits, in many cases, the federal and state governments are also creditors. In these situations, for whatever reason, the debtor owes their respected governments taxes, and thus is established a creditor-debtor relationship between the taxpayer and the government.

This situation is very common in bankruptcy. Yet because the creditor is the government, they have a very high priority of distribution and a more difficult burden of discharging their debt than most unsecured debtors. Thus, if you owe money on taxes from previous years, you can have your debt discharged, that is “wiped clean”, however the following six steps must be fulfilled in order to do so:

1)The due date of filing the return is at least 3 years ago
2)The tax return was filed at least 2 years ago
3)A tax assessment occurred at least 240 days ago
4)The returns are not fraudulent
5)The debtor is not guilty of tax evasion, and
6)The debtor must prove the past four years of filings had been filed.

These six steps must be followed to a tee in order to get the past years taxes discharged. If there are problems in qualifying for any of the steps, an attorney, the trustee, and the IRS are all very helpful in figuring if the debts can be discharged or not. Also, it may be a good idea to get a tax transcript from the IRS and the State for the tax years that you are going to try to discharge to make sure that your numbers are correct.