Believe it or not, you may be able to discharge your federal tax debts in bankruptcy. There are some specific rules and timelines that must be followed to qualify.In this blog I am referring specifically to what is known as a Chapter 7 bankruptcy filing which is a liquidation of debts available to individuals.

My firm, By The Book Taxes, located in Norwalk, CT specializes in income tax preparation for individuals, families and self-employed people. By the Book Taxes also helps clients resolve their tax debts by preparing and filing Installment Payment Agreements, Offers-in-Compromise, Currently Not Collectible and Innocent or Injured Spouse applications.

Federal income taxes may be eligible for discharge in bankruptcy if the following conditions are met:

  • The due date of the tax return for that tax year (including extension) is not less than three (3) years prior to bankruptcy filing date
  • The tax return was filed at least two (2) years prior to bankruptcy filing date
  • Any additional tax assessments due to audit or amendment occurred at least 240 days prior to bankruptcy filing
  • You can’t discharge a tax debt for a year that tax may still be assessed – under audit
  • An actual tax return must have been filed – no substitute for return (SFR) allowed
  • No fraud or willful tax evasion has occurred

Federal income taxes that are not eligible for discharge are those for tax years that are within the 3 year/2 year/240 day timelines, tax years that still may have future assessments, tax years for which an actual return has never been filed or where fraud or willful tax evasion has occurred.

Other taxes that may not be discharged in bankruptcy are called “trust fund” taxes. These refer to payroll, sales and excise taxes. They are called “trust” taxes because employers withhold payroll taxes from W-2 employees and are required to forward these taxes to the US Treasury.

Businesses collect sales and excise taxes from their customers and are required to file sales and excise tax returns and forward the tax to the appropriate federal or state and local taxing authority.

Failure to do so is a violation of the law. These taxes may be “compromised” with an “offer” but not discharged in bankruptcy.

If you have years of unfiled tax returns or owe the back taxes, please call me. I can help.