Lawrence Lawler: Hi! I am Lawrence Lawler, National Director of the American Society of Tax Problem Solvers. This series is on solving common tax problems.
Next I'll discuss the taxes in bankruptcy. Many people don't believe that taxes can be discharged in bankruptcy. We're not going to try and cover all of the rules but we're going to give you an outline of the things that you should consider if you're thinking of trying to discharge your taxes. The reason I am not going to cover all of the rules is because regardless you're going to need an attorney to represent you to file bankruptcy. But there're many bankruptcy attorneys who even have questions as to how the taxes are handled in bankruptcy. So I am going to give you the very basic rules on what you need to know to determine whether or not your taxes might be dischargeable in bankruptcy.
The first thing you should know is the rules that I am discussing right now have to do with income taxes and do not have to do with payroll or employment taxes, which have their own special rules but generally are not dischargeable in bankruptcy. Payroll taxes are treated a little bit different by the IRS. Although some of the penalties and interest related payroll taxes might be discharged in bankruptcy, we are really discussing income taxes right now.
Income taxes can be discharged in bankruptcy if three different conditions are met. The first condition is that the return that they relate to, the tax return itself, is more than three years old. So, if it's more than three years old, it must have also been filed from more than two years. And at the same time the tax on that return must have been assessed from more than 240 days. Those are the three basic rules on dischargeability of income taxes. So, if you'd discuss a return that is three years old and you filed it this week, that tax on that return is not going to be dischargeable, because it doesn't meet the two year rule, even though it's from more than three years ago.
So, a taxpayer filing the returns on time is critical if there is ever going to be a possibility for them getting a taxes discharge. Those are your basic rules for discharging taxes in bankruptcy. The Statutes of Limitations is going to be discussed next which determines how long the IRS has to collect taxes.