Discharging Income Taxes In Bankruptcy.
Updated: Mar 19
Income tax debt is dischargeable in bankruptcy if it is sufficiently old and certain other requirement are met under Bankruptcy Code §§ 523(a)(1), 507(a). Generally, for income tax debt to be dischargeable, the following must be true:
More than 3 years have passed since the tax return that generated the tax liability became due (including extensions);
The tax return must have been filed more than 2 years prior to the bankruptcy filing; and
The income tax debt must have been assessed more than 240 days prior to the bankruptcy filing.
More specifically, §523(a)(1) provides:
(A) of the kind and for the periods specified in section 507(a)(3) or 507(a)(8) of this title, whether or not a claim for such tax was filed or allowed; (B) with respect to which a return, or equivalent report or notice, if required— (i) was not filed or given; or (ii) was filed or given after the date on which such return, report, or notice was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition; or
(C) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax.
The period specified in § 507(a)(8) is as follows:
(8) Eighth, allowed unsecured claims of governmental units, only to the extent that such claims are for—(A) a tax on or measured by income or gross receipts for a taxable year ending on or before the date of the filing of the petition—(i) for which a return, if required, is last due, including extensions, after three years before the date of the filing of the petition; (ii) assessed within 240 days before the date of the filing of the petition, exclusive of—(I) any time during which an offer in compromise with respect to that tax was pending or in effect during that 240-day period, plus 30 days; and
(II) any time during which a stay of proceedings against collections was in effect in a prior case under this title during that 240-day period, plus 90 days; or
(iii) other than a tax of a kind specified in section 523(a)(1)(B) or 523(a)(1)(C) of this title, not assessed before, but assessable, under applicable law or by agreement, after, the commencement of the case;
Various events may stay (or toll) the applicable running of the above-described time frames. Such events include: (1) a taxpayer collection due process hearing; or (2) an offer in compromise (OIC). Installment agreements (taxpayer payment plans with the IRS) do not toll the applicable time frames for dischargeability under §§523(a)(1), 507(a).
According to § 507(a)(8), certain tolling events toll the time frames and add additional time. For example, if an OIC is filed, the mere filing of the OIC stays the 240-assessment period on the date of the OIC filing, and continues to toll until the OIC is rejected (or terminated after acceptance caused by taxpayer debtor’s default under the OIC agreement) plus 30 days after the OIC is no longer pending.
Also, the time frames are stayed when there is a stay of collection against the taxpayer caused by a collection due process hearing (the mere request for a CDP hearing stays collection proceedings against the taxpayer under the Internal Revenue Code.). This type of stay continues until resolution of the issues addressed in the CDP hearing, plus 90 days. In addition, CDP hearings are frequently continued at the request of the taxpayer (the IRC stay remains during such continuance period).
Moreover, an IRS-prepared substitute return is not considered a tax return that “was filed or given” under § 523(a)(1)(B). As such, the tax debt for such substitute return would not be discharged as it would not have met the 2 year filing requirement (all 3 requirements must be met).
Get the Tax Transcript
To determine whether an income tax debt is eligible for discharge, it is imperative that the taxpayer obtain a tax transcript, which will reflect: dates of filing; liability amounts; accrued penalties and/or interest; dates of assessment; and any applicable extensions, such as OICs (when OIC was offered, offer pending, accepted, rejected or terminated), and collection due process hearing (when a CDP hearing requested, date held, outcome of hearing).
Consult an attorney and/or CPA to determine if certain old income tax debt can be discharged in bankruptcy. The difficult part factoring in the applicable non-bankruptcy tolling events when calculating time frames under §§ 523(a)(1), 507(a)(8).
Click here for the link to request a tax return transcript from the IRS.
Click here to obtain information about filing offers in compromise, including forms 433A (information IRS requires to file with OIC) and 656 (the OIC).
Click here to obtain the form to request a collection due process hearing.