DISCHARGING INCOME TAX
Yes, contrary to popular myth, income tax can be discharged in bankruptcy, under either chapter 7 or chapter 13. This is true whether the income tax is owed to the Internal Revenue Service (federal income tax) or the Minnesota Department of Revenue (state income tax).
The bankruptcy law's provisions for discharging income tax are contained in 11 U.S.C. section 507 and section 523(a). These provisions are also summarized in IRS Official Publication 908, Bankruptcy Tax Guide.
In order for income tax to be discharged in a chapter 7 or 13 case, all three of the tests below must be met. If you filed your tax returns on time, and if the returns contained accurate information, it is likely to be quite simple to determine whether your income tax is dischargable.
First, the tax must be owed for a year for which three years has elapsed from the date the return was last due, on time, without penalty, until the date the bankruptcy was filed.
Second, the return must have been filed more than two years before the date the bankruptcy was filed.
Third, the tax must not have been assessed in the 240 day period before the date the bankruptcy was filed.
To illustrate what the above rules mean, let's take an example involving 2009 federal income tax of $10,000 plus $500 in interest and penalties, along with a bankruptcy filing date of May 1, 2013.
First, the 2009 tax return was due, at the latest, on April 15, 2010. The return was filed on March 1, 2010. This means that three years did indeed elapse from the return due date to the bankruptcy filing date. Therefore, the three-year rule was met.
Second, the tax return was filed more than two years before the bankruptcy was filed. Therefore, the two-year rule was met.
Third, the tax was assessed in the ordinary course a few weeks after the return was filed. Therefore, the 240-day rule was met.
Because in the example given above all three tests are met, the 2009 income tax of $10,000 and its accompanying $500 penalties are dischargable.
Remember, the debtor must pass all three tests in order to discharge income taxes in a chapter 7 or 13 bankruptcy case. Call our office in order to schedule a meeting with Mr. Andresen regarding the dischargability of your past due income taxes.