Taxation & Estate Planning

Real example: When can my taxes be discharged in bankruptcy?

By howardlevy

I do alot of IRS and bankruptcy work for my clients, and receive many questions about  it works.  Bankruptcy is a valuable tool to eliminate IRS liabilities.

To help in understanding taxes and bankruptcy, I thought it would be helpful to provide real life examples, starting here with a “bankruptcy timing” question I recieved from an enrolled agent on behelf of his client:

Howard, I have a client considering Chapter 7 bankruptcy on her IRS income tax debt.

2001 – owes $59,000.  Her return was due on 4-15-02, but she did not file it until 9-15-08.

2003 – owes $9,800.  Her return was due on 4-15-04, but she did not file it until 9-1-08.

2006 – owes $1,400.  Her return was due on 4-15-07, but she did not file it until 8-25-08.

She is in currently non-collectible status with the IRS.

When would she first be eligible for a Chapter 7 bankruptcy?

This illustrates Rule No. 1 in eliminating taxes in bankruptcy:  To be successful, tax returns must have (1) a due date that is three years before the bankruptcy is filed and (2) been actually filed two years before the bankruptcy starts.

In this example, it has been more than three years since the returns were due. But it has not been two years since they were filed.

The result: She could have all of the taxes discharged in a Chapter 7 bankruptcy on 9-15-10.  This is two years after the returns were filed.

If the returns were filed on time, then she would not have wait any longer – both the three year and two year rules would have been met – and bankruptcy could be filed immediately.

The non-collectible status will keep the IRS on hold while awaiting the bankruptcy filing date.

Stay tuned – I will be periodically posting more real examples of how bankruptcy, taxes and the IRS works.  You can also read my other blog entries on it and my articles.

Full post as published by IRS and the Law on September 27, 2009 (boomark / email).