Income Taxes Can Be Discharged in Bankruptcy

In case you didn’t know, income taxes are dischargeable (meaning, having the obligation to pay eliminated) in bankruptcy if they meet certain requirements (which you can see by visiting the link at the beginning of this sentence).   Pared down to basics, the taxes must be more than 3 years old on the date the bankruptcy case is filed (based on the date the return for a given year was last DUE to be filed), they must not have been assessed within 270 days prior to the bankruptcy case being filed, and more than 2 years since the returns were actually filed.

It is this requirement–that it must have been at least 2 years since the tax return for the given tax year being discharge was actually filed–that is being disturbed by certain court rulings.

Late Filed Tax Returns = Never Dischargeable? According to Some Courts

Due to slight changes in wording in the revisions to the bankruptcy code in 2005 (BAPCPA), several courts have now interpreted that provision to mean that if the tax return is filed late (meaning after April 15 of a given year if no extension, or after October 15 of a given year if there was an extension), then it is NEVER dischargeable in bankruptcy regardless of whether all the other requirements are met.

Without going into a detailed analysis of the nuances of the courts’ reasoning, suffice it to say this is a very Draconian (and in my humble opinion) a completely erroneous interpretation of the law.  Even the Internal Revenue Service agrees and so stated as part of a 2009 case, In re Sharp.   Yet that hasn’t stopped courts, primarily in the South (Alabama, Missouri), from taking the position that such taxes can never be dischargeable.

Not All Courts Agree

The courts in the Ninth Circuit (and many others)  have yet to pass on this issue, so for the time being it is important to be wary that just because you meet the “2-year rule” and the other requirements for discharging taxes, they may not be deemed discharged if the returns were filed late.

Be sure your attorney is up to date on the laws before deciding to file.