To forever discharge a tax debt, technically you must meet each of 4 conditions. But practically speaking, you meet 2 of them automatically.
In our last blog post we said that bankruptcy will discharge your income tax debt as long as that debt meets every one of a series of conditions—4 conditions, to be exact.
The good news is that of those 4, 2 of them hardly ever come into play. They are factually irrelevant to most people. So in most situations you only really have to meet the other 2 conditions. Read on to make sense of this. It’s actually surprisingly straightforward.
The Two Main Conditions
The two conditions that for sure pertain to you are both based on the passage of time. In both, to meet the condition a certain amount of time must have passed after a certain event before your bankruptcy case is filed:
1. Three years must have passed since the tax return was DUE.
2. Two years must have passed since the tax return was FILED with the taxing authority.
That’s it. Meet those two conditions and in most cases your bankruptcy case will discharge (permanently write off) the tax.
Let’s make this even clearer with a simple example. If you owed the IRS $15,000 on the 2010 tax year, and had filed that tax return on the April 15, 2011 due date, then you meet the two conditions as follows:
1. Since the tax return was due on April 15, 2011, you meet the first condition by filing your bankruptcy case more than three years after that due date, that is, after April 15, 2014.
2. Since the tax return here was in fact filed with the IRS on April 15, 2011, you meet the second condition by filing your bankruptcy case more than two years after, that is, after April 15, 2013.
Since you have to meet BOTH conditions, you would do so here by filing your bankruptcy case anytime after April 15, 2014.
A Few Important But Manageable Twists
Tax Return Filing Extensions: To meet the first 3-year condition you must be extremely careful about any extensions granted on the tax return filing due date. The 3-year waiting period is triggered by the tax return due date PLUS any extensions. So you MUST determine if you were granted an extension to file the return for the tax year at issue. If so, you have to add that extension time to the three years. Going back to the above example, if you had gotten an extension to file the tax return from April 15, 2011 to October 15, 2011, then this three-year condition would be met only by filing the Chapter 7 case after October 15, 2014.
Weekends and Holidays: It’s also crucial to determine the precise tax filing due date, accounting for the years when the 15th falls on a weekend, as well as occasional holidays. In fact, in our above example, October 15, 2011 was a Saturday, meaning that the precise legal due date was the following Monday, October 17, 2011.
The consequence of not paying sufficient attention to such details could be horrendous. In our example, if the person filed a Chapter 7 case on October 16, 2014 believing that this date was more than 3 years since the October 15, 2011 tax return due date, the $15,000 IRS debt would NOT be discharged because October 15, 2014 turns out to be slightly LESS than 3 years since the actual tax return due date of October 17, 2011.
Actual Tax Return Filing Date: To meet the 2-year rule it’s crucial to know accurately and precisely when the IRS or state taxing authority received the tax return at issue. Don’t rely on your memory or even your written record of when you mailed it in or filed it electronically or did so with a tax preparer. Various kinds of mistakes can arise. Instead take the extra step of finding out the true tax return filing date from the source—from the IRS or state tax authority.
“Substitute for Return”: For purposes of the 2-year rule, you must actually file a tax return instead of in effect allowing the taxing authority to do so. The latter often happens eventually if you neglect to file a tax return, or don’t do so until after the tax authority had determined your tax liability based on financial information it had in its records. The IRS calls that a “substitute for return.” The 2-year rule is triggered only by a tax return filed by the taxpayer, not by the IRS or state on your behalf.
The Other Two Conditions
Why do the other 2 conditions of the 4 needed for the discharge of an income tax debt seldom count? Because they involve circumstances not relevant to most people’s tax debts.
Here are the other 2 conditions:
3. 240 days must have passed since assessment of the tax.
4. Can’t file a fraudulent tax return or intentionally attempted to evade the tax.
The first of these seldom comes into play because almost always this condition is easily met by simply meeting the earlier 3-years-since-tax-return-due and 2-years-since-filed-return conditions. “Assessment”—the tax authority’s formal determination of your tax liability—usually happens within days or weeks of the filing of your tax return. So waiting 2 years to file will usually get you way more than just 240 days after the assessment.
This 240-day condition is for the unusual situations in which a tax can’t be or isn’t assessed as quickly as usual, perhaps because the amount of tax is in dispute as a result of a tax audit or tax court litigation. If there is any doubt, the taxing authority can tell you when the tax was assessed.
As for filing a fraudulent tax return or intentional tax evasion, these accusations are also quite rare. We’re not talking here about unintentional mistakes, or probably nor even some relatively modest fudging. At issue here is failing to report a meaningful chunk of income or claiming inflated or invalid deductions.
So, in most cases you can write off your income taxes through bankruptcy as long as more than two years have passed since the tax return at issue was filed, and more than 3 years since that tax return was legally due to be filed (plus any extensions granted).