Got unpaid taxes for 2012? October 16, 2016 those taxes reached the end of the line as priority claims in bankruptcy.
They lose their protected status and can be discharged in bankruptcy.
Discharged, as in, no longer a personal liability. No longer entitling the IRS to levy and garnish because of a bankruptcy discharge.
Taxes collectible for 10 years from assessment, outside of bankruptcy.
That’s the view from 30,000 feet on discharging taxes in bankruptcy. Let’s look at the details and see why October 15th is important if you have old taxes you haven’t paid.
Three rules govern discharge of taxes
To wipe out taxes in bankruptcy, three rules must be met. The first one, the “three year rule”, says taxes can’t be discharged until three years have passed since the tax return was last due.
Taxes newer than that are priority claims. Priority tax claims aren’t dischargeable.
There are a couple of wrinkles in the three year rule.
First, the rule starts running from the day on which the tax return was last due without penalty. Without an extension of time to file, that’s usually April 15th.
So, the return for 2012 was due April 15, 2013. You start counting from then.
Why are we talking about this in October? Because, if you got an extension to file the return, the return is last due without penalty on October 15th. With an extension, you start counting three years in October.
For 2012 taxes, October 16 2013 is day one, and October 15, 2016 is the last day in the three year period.
Without an extension, 2012 taxes became dischargeable in bankruptcy on April 16 of this year.
Tax filing date doesn’t matter
Filing your tax return before the deadline doesn’t get you a head start on the three year rule.
Even if you got an extension and actually filed your return in June, the controlling rule still starts counting from the last day on which you could have filed the return: October 15th.
Other bankruptcy rules apply
The other two rules governing discharge of taxes still have to be met.
The “two year rule” says that if the tax wasn’t filed on time, it has to have been on file for at least two years to be discharged in bankruptcy. So, even taxes where the three year rule is met don’t go away in bankruptcy if the return was late and hasn’t been on file for two years.
The the “240 day rule” says that taxes assessed within 240 days of the bankruptcy filing aren’t discharged, even if the other two rules are met.
Tax year must be closed
There’s an additional strategic issue involving taxes and bankruptcy in Chapter 13. A Chapter 13 plan can provide for payment of taxes that aren’t dischargeable over the life of the Chapter 13 plan.
But, BUT, the tax year must be complete in order to include the tax in the payment plan. So, if you file in October, 2016 to discharge 2012 taxes, any tax you may owe for 2016 won’t be included in the bankruptcy case.
Depending on the amount you expect to owe for this year, you may be well advised to wait til January 2, 2017 to file your bankruptcy case.
The important point is well-advised. Discharging taxes in bankruptcy is highly detailed. Get good advice from an experienced bankruptcy attorney.
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