What Can I Discharge In Bankruptcy?
Can I discharge taxes and other debts to the government in bankruptcy?
The answer to this question is the favorite of many attorneys: “It depends.”
Under the Bankruptcy Code, most recent, unsecured tax claims on income or gross receipts are non-dischargeable. This means that even if you are eligible to file for bankruptcy and receive a general discharge, your liability for certain taxes will survive.
Three years…two years…240 days.
In order to determine whether certain taxes can be discharged you need to know the following information:
- When was the tax return due?
- When was the tax return actually filed?; and
- When was the tax actually assessed?
In general, a tax may be discharged if the following conditions apply:
- The tax return must have been due more than three years ago (including any extension);
- The tax return must have been filed more than two years ago; and
- The tax must have been assessed more than 240 days ago.
However, as with most laws, there are many exceptions to the general rule. For example, the assessment period may be extended if, during the 240 days prior to the petition date, there was in effect either:
(a) An Offer In Compromise; or
(b) a stay against collections in the debtor’s prior bankruptcy case.
In addition, applicable time periods will be suspended any time the government is prohibited from collecting a tax because the debtor filed an appeal to a collection action or any time the automatic stay was in effect or collection was prevented in one or more confirmed plans of reorganization. In either event, 90 days must be added to the applicable time period. Moreover, the general rules on dischargeability of tax claims may not apply where returns were filed late, where a Substitute For Return was filed by the IRS without cooperation and input by the tax payer and/or the tax payer filed a fraudulent return.
The only way to actually determine whether a tax is dischargeable is to request and review the official account transcript from the Internal Revenue Service. Income taxes due to the California Franchise Tax Board will usually comply with the time periods identified on the IRS account transcript–call your local IRS office for copies. Be sure to request a transcript for each year in which you owe, or suspect that you owe, taxes.
In general, the above rules uniformly apply to income taxes. Taxes that can never be discharged include employee withholding taxes and various other kinds of “trust fund” taxes. In California, there are special rules and timelines regarding the discharge of sales taxes – be sure that your attorney understands them!
Other government debts that may be dischargeable
Not all debts to the government are considered taxes and many are actually dischargeable without dealing with the complex rules set forth, above. For example, Social Security and other government benefit overpayments are generally dischargeable debts.
The dischargeability of tax liabilities is a complex subject and may require expert analysis. If you owe back taxes or other government debt, you should seek the counsel of a competent bankruptcy attorney to help navigate these issues.
About Hurlbett & Olmstead Bankruptcy Attorneys
Since 1994, we’ve helped thousands of people in Santa Barbara, Ventura, Paso Robles, Santa Maria and San Luis Obispo regain financial peace in their lives. These people now experience a life free from the stress and worry that comes from watching unpaid bills mount, answering calls from arrogant debt collectors, receiving a lawsuit from a process server, finding an empty spot where a car has been repossessed, missing money from a garnished paycheck, or knowing that their house will soon be sold at foreclosure.
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