Bankruptcy: Can Taxes be Forgiven?
People often call in asking if their taxes can be forgiven in bankruptcy. And the answer is … maybe. Let’s dive in further.
In order to have your taxes forgiven, you must pass the 3/2/240 Rule:
3: Your taxes must have been due at least 3 years ago. So for example, your 2018 taxes are due April 15, 2019. That particular tax year passes the “3 rule” on April 16, 2022. Keep in mind here, if you filed an extension that year, making your taxes not due until October 17, 2019, then you would not pass the “3 rule” until October 18, 2022.
2: You must have filed your taxes 2 years prior to filing your bankruptcy. Now, YOU must have filed that return yourself. If the IRS filed a substitute return on your behalf, then you will not pass the “2 rule” per the bankruptcy code. In a situation where the IRS filed the tax return on your behalf, it’s not too late to then turn around and file your own return, and let the clock run.
240: The IRS must have assessed the income tax debt at least 240 days before you file your bankruptcy petition, or not at all. Assessed just means that the IRS is went through your tax return to make sure that everything is correct.
Also, your taxes will not ne discharged if:
- The taxes are income taxes. Taxes other than income, such as payroll taxes or fraud penalties, can never be eliminated in bankruptcy.
- You committed fraud or willful evasion. If you filed a fraudulent tax return or willfully attempted to evade paying taxes, such as using a false Social Security number on your tax return, bankruptcy can’t help.
- The IRS already placed a Federal Tax Lien on your property
Have a question on what tax debts can and cannot be forgiven in a Bankruptcy? Call us at 616-920-0555 or use the Contact Form below.