Depends.
There are a few requirements that must be meet in order to have tax debt discharged. This memo provides a quick 4 STEP process to determine if your client can discharge their tax liability. Each step must be met in order to discharge tax debt.
STEP 1 - What kind of tax debt?
Generally, only income tax debt can be discharged.
** Property Taxes – Property taxes incurred prior to the commencement of the case that were last payable without penalty more than a year prior to the filing are dischargeable under §507.
If your client needs to discharge "income taxes" go to STEP 2.
STEP 2 - Can the income tax debt classified as a "priority" debt?
There are two (2) ways taxes can qualify as priority.
1. "THE THREE YEAR RULE" – When was the tax return due?
a. Tax returns are generally due on April 15th of the following year. If the tax return was due within 3 years of the BK filing date, then you have a priority debt. If your tax debt is from 2005, the tax return for that debt would have been due on April15, 2006. 3 years after this date would be April 16, 2009. Therefore, tax debt owed in 2005 is NOT a priority debt if bankruptcy case if filed after April 16, 2009.
b. EXCEPTION - Be careful to ask about tax extensions. If a debtor received an extension then the due date of the tax return changes the time frame.
c. ** If the 15th fell on a Saturday, Sunday, or a specific national holiday the deadline would not be until the following Monday or next day.
2. "THE 240 DAY RULE" – When was the tax debt assessed?
a. If the tax debt was assessed within 240 days (roughly 8 months) prior to filing
bankruptcy then the tax debt is priority. For example, a tax debt that was due in 2003 but assessed (normally when filed) in Jan. 2010, would still be priority debt.
b. EXCEPTION – Look out for an "offer in comprise" which can extend this period, or a prior bankruptcy case has been filed during those 240 days.
If your client DOES NOT have a priority tax debt go to STEP 3.
STEP 3 – When did your client file the tax returns?
The tax returns MUST have been filed either:
1. "THE TWO YEAR RULE" – Must have been filed at least 2 years before the date of filing the bankruptcy case; OR
2. "ON TIME RULE" – Taxes must have been filed on time (by April 15).
** If the IRS filed a substitute return, this will not work.
If your client meets this step, go to STEP 4.
STEP 4 – Fraud or Willful Evasion?
If your client filed a fraudulent tax return or made any attempt to willfully evade paying taxes - those taxes will not be discharged. Generally, you will want to inquire into why the taxes were not paid or filed late.
CONCLUSION – If your client meets all four (4) steps then you may be able to discharge the tax debt. You will need to file an adversary proceeding and collect $1,500 retainer, $750 down and the rest within 90 days.
**TAX LIENS**
Tax liens survive discharge. Generally, tax liens are not "judicial" in nature and therefore cannot be avoided pursuant to §522.
