Some tax debts could be dischargeable in bankruptcy

Kenneth P. Reynolds is a principal with the law firm Reynolds, Gold & Grosser PC.

One of the most frequently asked questions in my practice as a bankruptcy practitioner is whether tax debts are dischargeable in bankruptcy. My typical response is that tax debts are most frequently nondischargeable in a bankruptcy case, but there are exceptions. Lets first focus on which tax debts are nondischargeable. Among those are:

1. Any tax for which a return, if required, was not filed, or which the debtor attempted to evade.

2. Any tax for which a late return is filed within two years before the filing of the bankruptcy.

3. Taxes on income of gross receipts for which a return, if required, was last due within three years of the filing of the bankruptcy, or was assessed within 240 days before the filing of the bankruptcy, or has not yet been assessed but is assessable after the filing of the bankruptcy.

4. Property taxes assessed before commencement of the bankruptcy case and last payable without penalty less than one year before the filing of the bankruptcy.

5. Excise taxes on transactions for which a return was required and last due less than three years before the bankruptcy, or on transactions for which no return was required and which occurred less than three years before the bankruptcy.

6. Taxes required to be collected or withheld by the debtor, such as employment "trust fund" taxes or sales taxes.

Any penalty related to the taxes listed above is also nondischargeable, unless the penalty is solely punitive in nature or relates to a transaction that occurred more than three years before the filing of the bankruptcy petition.

A common example is that a person may have filed a timely 1040 tax return more than three years prior and just could not afford to pay the actual taxes due. As a result, the taxes, penalty and interest in this scenario may in fact be dischargeable in bankruptcy. For the purposes of calculating time limits, taxes are found to be payable from the date the relevant tax return is due rather than the date on which quarterly estimated payments are required. Many individuals in the situation of owing taxes are unsure when their taxes were due. A person may obtain a transcript from the Internal Revenue Service to determine these dates.

A problem may arise in the situation where a tax lien has been filed on an individual's real property such as real estate. In this scenario, the tax debt itself may still be dischargeable, but the lien remains on the land in a Chapter 7 bankruptcy, even though the tax debt has been discharged from the bankruptcy.

In summary, if the debtor files a tax return, the tax debt may be dischargeable if all of the following criteria are met.

The return was filed on time, or the return was filed late but more than two years before the bankruptcy.

The tax is a 1040 tax and the tax return was last due more than three years prior to the date the bankruptcy petition was filed.

The debtor did not willfully evade taxes.

An unsecured tax claim for which a return has not been filed is never dischargeable in a Chapter 7 bankruptcy, but may be dischargeable in a Chapter 13 bankruptcy. For a complete analysis of what taxes may or may not be dischargeable, an individual should contact a CPA, tax attorney or bankruptcy attorney.