Taxation & Estate Planning

How can an extension to file a tax return impact a discharge of taxes in bankruptcy?

By howardlevy

One rule to follow in bankrupting income taxes is that the liability must be from a return that was due to be filed three years before the bankruptcy is commenced. The key is to be careful to include extensions of time to file in calculating the due date of the return, especially starting in 2009.   

Until 2004, the IRS used a two step process for extensions, with an automatic four month extension allowed until August 15, followed by a second to October 15.  For 2005 returns due in 2006, the IRS streamlined the process, allowing one automatic six month extension to October 15.  Those 2005 returns (due in 2006) are now becoming ripe for bankruptcy in 2009.

In preplanning for clients, I have already seen automatic six month extensions for 2005 tax returns to October 15, 2006, but the return was filed sooner, maybe in August, 2006.  This discrepancy was less likely under the prior rules, when if all that was needed was time until August 15, that was what was requested and granted.  

Don’t be fooled by the likelihood of seeing earlier return filing dates.   Continue to focus on and use extension dates in calculating the three year rule.  

More on bankrupting taxes can be found in my recent article in the Journal of Enrolled Agents “But I thought you can’t eliminate taxes in bankruptcy,” or in this presentation outline on bankruptcy and the IRS.

Full post as published by IRS and the Law on January 03, 2009 (boomark / email).