If you have oppressive tax debt that is only metastasizing larger, like a cancer, because of interest and penalties assessed by the IRS, you may have abandoned all hope that you will ever be rid of them. Indeed, many people believe that tax debt is something that is next to eternal — something that will be with someone throughout one’s entire life. In bankruptcy, some tax debts are not subject to discharge but many are subject to discharge as long as certain criteria are met.
Under 11 U.S.C. §523 (Exceptions to Discharge), certain taxes are not discharged in bankruptcy if they are deemed “priority” tax debts under 11 U.S.C. §507 (Priorities). In other words, a particular tax debt must have certain characteristics that cause it to fall within one of the priority categories enumerated in §507.
Consider for instance debt stemming from property taxes. In order to be given priority status in bankruptcy under §507 and, therefore, not be subject to discharge in bankruptcy, a property tax debt must be incurred prior to the start of a bankruptcy case and last payable, without penalty, after one year before the filing date of a bankruptcy. This means that if a property tax was incurred and last payable, without penalty, more than one year before the filing of a bankruptcy it can be discharged. Consider that someone has a property tax debt for tax year 2009 and that the debt would have been payable, without penalty, by December 31, 2009. Consider also that the same person files for bankruptcy relief on January 1, 2011. Under these circumstances, the property tax debt would be subject to discharge in bankruptcy because it was incurred in 2009 and last payable, without penalty, by December 31, 2009, more than one year before the filing of the bankruptcy on January 1, 2011.
Consider also tax debt that arises from someone not withholding sufficient funds out of one’s paycheck to satisfy the appropriate tax liabilities for one’s particular level of income. Such tax debt is typically referred to as “1040 tax debt.” Even this kind of tax debt can be and is discharged in bankruptcy as long as certain criteria are satisfied. Under 11 U.S.C. §§507 and 523, 1040 tax debt will be priority debt as long as the tax is for a tax year ending on or before the filing of a petition AND:
a. Stems from a tax return or an equivalent report or notice that is due less than 3 years before the filing of a bankruptcy case;
b. Is assessed within 240 days of the filing of a bankruptcy petition;
c. The tax return or an equivalent report or notice for the tax debt is filed less than 2 years before the filing of a bankruptcy case.
So, let’s say that someone owes 1040 taxes on a return for tax year 2000 and let’s further assume that the person files for bankruptcy on January 1, 2011. The tax returns for 2000 would be due by April 15, 2001. Let’s assume still further that the person duly files the tax returns by April 15, 2001. In this circumstance, the 1040 tax debt would be discharged in bankruptcy because it stems from a tax return that was due on April 15, 2001 which is more than three years before January 1, 2011. Upon the filing of the tax return on April 15, 2001, the tax debt owed for tax year 2000 would be deemed “assessed” as of that date. The date of the assessment – April 15, 2001 – would be more than 240 days prior to January 1, 2011. Since the person filed tax returns on April 15, 2001, the third part of the above rule would also be satisfied because April 15, 2001 is more than 2 years before January 1, 2011, the filing date of the hypothetical bankruptcy petition.
Be advised, however, that the discharge of tax debt in bankruptcy is a highly nuanced and complicated area. There can be ways to discharge tax debt but an experienced, highly qualified and specialized attorney is required to get it done right. Contacting and scheduling a free appointment with a knowledgeable and reputable bankruptcy attorney who can offer expert advice and customize a path towards true financial freedom is only the first step.