Can I Eliminate Past Due Income Taxes in Bankruptcy?

In short, the answer to this common question is Yes, but not always. Many people believe that income taxes are not dischargeable in bankruptcy. In fact, you are able to discharge federal, state, or local income taxes in both a Chapter 7 and a Chapter 13 bankruptcy if your tax debt meets certain rules. These rules are commonly referred to the 3-2-240 rules. That is, you can discharge income taxes that came due 3 years before you filed your bankruptcy case, if you filed your taxes at least 2 years prior to the bankruptcy filing, and if it has been at least 240 days since the taxes were assessed. All three rules must be met in order to discharge your income taxes.

The 3-Year Rule: This rule requires the due date for past-due income taxes to be at least three years before you file your bankruptcy case. Most state and federal income taxes are due on or around the April 15th of each year. For example, your 2011 federal income taxes are due on April 15, 2012. If you want to discharge your 2011 taxes, the earliest you can file for bankruptcy is April 15, 2015 (April 15, 2012 plus three years).

The 2-Year Rule: This rule requires that your income tax returns to have been filed at least 2 years before the filing of your bankruptcy petition. Therefore, even if you file your returns late, you can still discharge your tax debt as long as you file your taxes at least 2 years before filing for bankruptcy. For example, your 2011 income taxes were due on April 15, 2012. However, you did not file your taxes until June 1, 2013. If you want to discharge your 2011 taxes, the earliest you can file for bankruptcy is June 1, 2015 (2 years from the date you filed your taxes and more than three years from the date your taxes were due).

The 240-Day Rule: This rule requires that your taxes were assessed at least 240 days before you file your bankruptcy case. Usually, this date will be very close to the date you file your taxes, but if you are audited and the IRS finds a mistake, your assessment date will be later.

If you meet all three of these rules, your tax debt can be eliminated in both a Chapter 7 and a Chapter 13 bankruptcy.