Many people will be surprised to learn that, under certain circumstances, old debt owed to the IRS may be wiped out in bankruptcy. Of course, there are some taxes that will always survive the Court’s order of discharge. For example, amounts due under fraudulent returns cannot be eliminated even though the general requirements for discharge are met.
In instances where the debtor has disclosed federal tax debt to us, we ask the following questions to determine whether the obligations may be dischargeable:
1. What was the due date for filing the old tax return? Is that at least 3 years ago?
2. Was the return filed at least 2 years ago? Did the IRS not file a Substitute for Return?
3. Was any tax assessment more than 240 days ago (i.e., about 8 months)?
4. Did the tax return correctly state your income?
5. Have you been free from charges of tax evasion?
If the answer to all these questions is yes, then the tax has a good chance of being discharged in bankruptcy. Keep in mind that these time limitations may be tolled by the filing of an offer in compromise or the automatic stay in bankruptcy. Also, tax liens survive bankruptcy and remain active for 10 years plus 30 days beyond the date the tax is assessed.
A caveat regarding due dates is that Covid-19 caused some extensions. Tax returns for 2019 were due all the way to July 15, 2020, while 2020 taxes were due May 15, 2021.