Discharging Taxes in Bankruptcy

Can I discharge income taxes in bankruptcy?

Generally, income taxes may be discharged in bankruptcy unless any one or more of the following apply to your situation:

1. No tax return was filed by the taxpayer for the tax in question (or a fraudulent return was filed),
2. A return was filed less than 2 years from the date that the bankruptcy is filed.
3. The return was filed but it was due less than 3 years from the date of filing for bankruptcy, or
4. The tax was assessed less than 240 days before filing the petition

These rules sound fairly straightforward. But it can be very tricky and time-consuming to determine if taxes for a particular year are dischargeable. It’s important to know that the time limits are tolled (i.e. the clock stops running) during certain times. Also, a return filed by the IRS for the taxpayer doesn’t count. I offer my clients two levels of service when they have potential tax issues.

1) Method number 1. One way is for the attorney to carefully study the IRS transcripts and determine that there is no advantage to waiting to file bankruptcy. For example, let’s assume, that a particular tax return was filed a year and 1/2 ago and we were to file it today. That tax would not be discharged because, in order for a tax to be discharged, the tax return must have been filed at least 2 years prior to the filing of the bankruptcy. But if we were to wait 6 months it might be discharged. Under this method, the attorney doesn’t take the client’s word for when the return was filed. Instead, the attorney checks the government’s tax transcripts to see when the client actually filed his return.

2) Method number 2. A second way to handle a bankruptcy tax case is for the attorney to file the case without researching the government’s tax transcripts. Under this method, the client assumes the risk that by filing sooner rather than later there might be taxes that are not getting discharged that could be discharged if the client were to wait to file. Under this method, the attorney files the bankruptcy case without assuring the client that there is no advantage in waiting to file.

The advantage of using method number 1 is that by waiting to file bankruptcy the client might be able to discharge taxes that he wouldn’t be able to discharge if he filed sooner rather than later. The advantage of method number 2 is that the client saves money because the attorney’s fee is lower. Also, the bankruptcy may be filed sooner using method #than with method number 1.

I am willing to use either method. It’s up to the client which method to use.
If we are going to use method 1 I must get the IRS transcripts. How do I do that?

I have the client sign IRS form 8821. Then I call the IRS Practitioner’s Hotline 866-860-4259. Sometimes they put me on hold for an hour or more.

Eventually, an agent comes on the line and he asks me how he can help me. I explain that I need the account transcripts. He gives me a fax number and I fax over the form 8821. I stay on hold while he waits to receive the fax. Eventually, he tells me he has the fax. We discuss again what I need and he agrees to fax or mail the transcripts.

When I get the transcripts I look them over. Often I use an online program called The Tax Discharge Determinator.
This is a tool that can be very useful.

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