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Tax Debt - The Only Thing Certain is Death & Taxes

by on 1/2/2013

As promised, we're beginning our series, going more in-depth of the cases of discharge, starting with Tax Debt.

#1 - Tax Debt – The only thing certain is death and taxes

There are certain dates and events that your tax debt can be discharged. This is where a good attorney is essential. The best thing to do is know what years you have tax liabilities, and then go to the Internal Revenue Service office and get a print-out of your tax transcript for those years. Don’t rely on your memory of what happened when.

There are five basic rules to remember:

  1. The three year rule
  2. The two year rule
  3. The 240 day rule
  4. The fraud rule; and
  5. The tax evasion rule

First, three years must have passed since the taxes were due. April is usually the month taxes are due, but if you file an extension that due date changes to the extension date, even if you file them before that date arrives.

Second, a tax return must have been filed two years ago. This does not always mean that you had to file it, but a return must have been filed that satisfies this requirement. This is where an experienced attorney can help.

Third, 240 days must have passed since the tax was assessed. There are certain events that can stop the 240 day clock, such as an offer of compromise, a request for a hearing or trial, or another bankruptcy case. This is where the tax transcript will come in handy; all of these “tolling” periods will be listed on the transcript. An experienced attorney can identify these items and determine when the 240 days rule has been met. One other event that can impact this rule is a re-assessment of the tax. This will start the 240 days as opposed to the additionally assessed taxes.

Fourth, the tax return that was filed cannot be fraudulent.

Fifth, you cannot willfully evade the taxes. There are a whole set of factors that the courts will consider when determining this item. An experienced attorney can help you go through the factors.

These rules apply to personal income taxes. Other taxes such as sales tax, employment taxes and such will not follow these rules and some taxes such as payroll trust fund taxes are never dischargeable in a bankruptcy.