Question:
Is a debt to the IRS for back taxes ever forgiven after filing Chapter 7 Bankruptcy? If so, after how many years?
Answer:
The rules for discharging (forgiving) back tax debt in bankruptcy are relatively straightforward. However, since you don’t mention the specific type of tax, I will assume we are talking about income tax. Certain taxes like employment taxes can never be forgiven in bankruptcy. Here are the rules for discharging income tax in bankruptcy:
1. The 3 year rule: The tax return due date must be 3 years or more prior to the date of your bankruptcy filing. For example, for 2011, the most recent year you can discharge in bankruptcy is 2007 because the tax return for 2007 was due April 15, 2008; that date is more than 3 years ago. Caveat: if you filed an extension, then the extension date counts. So, if you filed for an extension for your 2007 tax return, that due date is October 15, 2008, as of this post (7-14-11), that tax would not be discharged in a bankruptcy filed before October 15, 2011.
2. The 2 year rule: The tax return must have actually been filed at least 2 years prior to the filing of your bankruptcy petition. This rule basically requires the taxpayer to actually file the tax return. If a taxpayer goes long enough without filing a tax return, the IRS has the option to file a return on behalf of the taxpayer. That type of return is known as a substitute for return. A substitute for return does not count for purposes of the 2 year rule.
3. The 240 day rule: The tax must have been assessed at least 240 days prior to the bankruptcy petition filing. This rule primarily arises when there is an audit of some kind or additional tax assessed. The taxpayer must wait 240 days from when the tax was assessed before filing bankruptcy to discharge that debt in bankruptcy.
There are some other technical rules that go along with the 3 main rules listed above and there are certain events that pause the times from accruing. You will want to hire an attorney that knows the ins and outs of tax debt in bankruptcy to make sure you get as much tax debt discharged as you can.
In the big picture, the tax debt must be more than 3 years old before it can be forgiven in bankruptcy.
