The Tax Man Cometh!! (Not Necessarily So) Eliminating Older Tax Debt in Bankruptcy

BankruptcyOften, I consult with individuals with tax debt, income tax debt owed to the IRS for past years, as much as 10 years in the past, and as recently as last year. Often, my clients are sustaining IRS agreements to pay back taxes in the tens of thousands, $20,000, $35,000, even $80,000.

Are you, too? Do you owe the IRS? Is this making life too difficult financially? You probably want to know if this debt can be eliminated in a bankruptcy case. And, if so, you probably want to know how much can be eliminated.

The answers depend upon several factors. But, yes, indeed, it is possible to discharge old tax debt in bankruptcy – old tax debt. And this debt is in addition to generally unsecured obligations such as credit card debt, medical debt, pay day loans, and so forth.

If you need a fresh financial start from your debt burdens, understand that income taxes may be included therein. Bankruptcy allows the discharge of tax debt in certain circumstances. Of course, you cannot discharge tax debt that is the result of a fraud penalty, tax evasion, or payroll taxes owed as a result of employer obligations; but you can discharge old income tax debts in general if certain conditions are clearly satisfied.

Here are the rules:

  1. The taxes must be income taxes – your income taxes; not payroll taxes or property taxes;
  2. You must have filed an IRS tax return for the subject tax years, on time, at least two years before filing for bankruptcy;
  3. The tax liability is from a return that was due at least three years before filing for bankruptcy; and
  4. The tax liability was actually assessed by the IRS at least 240 days before filing for bankruptcy. SO – what does “assessed” mean? A tax liability becomes formalized, or assessed, when the IRS accepts your return and you have identified that you “owe.” For example, let’s say you filed your 2015 taxes last April, on April 3rd. Let’s say that your return showed that you owed $2,500. Let’s say that the IRS then accepted your return on April 3rd. If so, then your liability was thusly “assessed” on April 3rd.

The key here is that you MUST have filed your IRS returns and, more importantly, ON TIME each year. I have often counseled individuals who have not filed returns at all, in years, or in the last few years, or for the current year. Unfortunately, this can be fatal to your ability to have your old tax debts eliminated in a bankruptcy case. In any case, let’s take the above rules and apply them to a hypothetical scenario.

Let’s say this: You believe you have tax liability for the following tax years: 2007, 2009, 2012, and 2015.


    • You did not file your 2007 return – you know you owe $5000. The liability has not been assessed.
    • You filed your 2009 return, and on time – you owed $1000. The IRS accepted your return and the tax was therefore assessed.
    • You filed your 2012 return, and on time – you owed $2000. The IRS accepted your return and the tax was therefore assessed.
    • You have not filed your 2015 – and you believe you owe $5000. There is no return, and thus no liability for the IRS to assess.

Under this hypothetical, your 2009 and 2012 tax liabilities would be dischargeable because the taxes were assessed, due to the filing of your returns on time and they are more than three years old. However, the 2007 and 2015 liability has not been assessed because the returns were not filed, and thus you would still be responsible for these liabilities.

While each individual’s circumstances are unique, at Bailey & Galyen, P.C., we can assist you in understanding your exact tax liabilities if you should wish to file for bankruptcy protection.

If you are struggling to repay old tax debt, please, make an appointment with us today and let us guide you through the process. And, as a friendly reminder, file those taxes!!!

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