Bankruptcy can Eliminate Income Tax Debt

Debtors often believe that they cannot eliminate tax debt to through bankruptcy. You may be surprised to learn that if you owe the Internal Revenue Service or the Georgia Department of Revenue for back income taxes, a bankruptcy attorney may be able to help you wipe out such liability by filing bankruptcy.

Normally, tax liability that is more than three years old is dischargeable in bankruptcy.

The rule is a little more complex than simply counting back by three tax years. First, dischargeability in bankruptcy only applies to income tax debt. Further, income tax debt is only dischargeable for tax returns that were due more than three years from the date of the bankruptcy filing. For example, 2006 income tax returns were due on April 15, 2007. If a debtor timely filed his or her 2006 tax return by the 2007 deadline, then the liability incurred for the 2006 tax year would be dischargeable if the bankruptcy is filed after April 15, 2010, or three years from the due date of the 2006 tax return. However, if the debtor did not file his or her 2006 return until October 15, 2007, then the tax debt would not be dischargeable unless the bankruptcy was filed after October 15, 2010. If the debtor filed his or her 2006 tax return BEFORE April 15, 2007, the bankruptcy filing date would still need to be three years after the DUE date, or April 15, 2007.

The three year rule is difficult to apply where the debtor filed his or her return several years late because tax liability from tax years that are more than two years from the bankruptcy filing date can be dischargeable without applying the three year rule. For example, if the debtor filed the 2006 tax return on April 15, 2009, then the bankruptcy filing date for dischargeability of the 2006 liability would have to be after April 15, 2011 (rather than April 15, 2012, if we were using the straight application of the three-year rule). Both the three-year rule and the two-year rule are subject to exceptions when debtors have negotiated offers in compromise with the IRS or where the IRS assessed additional taxes after the filing date.

Determining whether tax liability is dischargeable is a complex process that requires the advice of probably both a tax attorney and a bankruptcy attorney. If you have tax liability that you are unable to pay and would like to discharge in bankruptcy, you should seek the advice of a bankruptcy attorney. Before you meet with the attorney, you would probably benefit from ordering a tax transcript from the IRS, which is free. Local tax offices in Georgia can be found here. The tax transcript will give your attorney important dates that are necessary in the process of determining whether the tax debt is dischargeable in bankruptcy.

If you have questions and would like to schedule a free consultation with an attorney, call the Law Offices of Charles Clapp at (404) 585-0040 to schedule an appointment.