Got unpaid taxes for 2019? Three tax discharge timing rules control when those taxes can be wiped out in bankruptcy.
On April 15, 2023 those taxes reached the end of the line as priority claims in bankruptcy. Or, the magic date may be October 15, 2023, if you got an extension to file the return.
As non-priority claims, the taxes lose their protected status and can be discharged in bankruptcy.
Discharged, as in, no longer a personal liability. No longer entitling the IRS to levy and garnish because of a bankruptcy discharge.
Outside of bankruptcy, taxes are collectible for 10 years from assessment.
That’s the view from 30,000 feet on discharging taxes in bankruptcy. Let’s look at the details and see why April 15th is important if you have old taxes you haven’t paid.
Three year rules to discharge taxes
To wipe out taxes in bankruptcy, three rules control.
The first one, the “three year rule”, says taxes can’t be discharged until three years have passed since the tax return was last due.
Taxes newer than that are priority claims. Priority tax claims aren’t dischargeable.
There are a couple of wrinkles in the three year rule.
First, the rule starts running from the day on which the tax return was last due without penalty. Without an extension of time to file, that’s usually April 15th.
So, the return for 2019 was due April 15, 2020. You start counting from then.
Unless you got an an extension, 2019 taxes become dischargeable in bankruptcy on April 16 of 2023.
Filing your tax return before the deadline doesn’t get you a head start on the three year rule.
So, even if you got an extension and actually filed your return in June, the controlling rule still starts counting from the last day on which you could have filed the return: October 15th.
Two year rule
The second rule governing the discharge of taxes is the “two year rule”.
The “two year rule” says that if the tax return wasn’t filed on time, it has to have been on file for at least two years to be discharged in bankruptcy.
So, even taxes where the three year rule is met don’t go away in bankruptcy if the return was late and hasn’t been on file for two years.
Recent assessment rule
The third rule, the “240 day rule”, says that taxes assessed within 240 days of the bankruptcy filing aren’t discharged, even if the other two rules are met.
Tax year must be closed
There’s an additional strategic issue involving taxes and bankruptcy in Chapter 13. A Chapter 13 plan can provide for payment of taxes that aren’t dischargeable through the Chapter 13 plan.
But, BUT, the tax year must be complete in order to include the tax in the payment plan. So, if you file in October, 2023 to discharge 2019 taxes, any tax you may owe for 2023 won’t be included in the bankruptcy case.
Depending on the amount you expect to owe for this year, you may be well advised to wait til January 2, 2024 to file your bankruptcy case.
The important point is well-advised. Discharging taxes in bankruptcy is highly detailed. Get good advice from an experienced bankruptcy attorney.
More about taxes in bankruptcy
What about unfiled tax returns
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