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Accounting Series- Confusing Tax Forms

It is a common misconception that bankruptcy can’t help you with income tax debt. Some taxes can be forgiven. Penalties and interest can be forgiven.

Also, it is very likely that your attorney can arrange for a comfortable no interest payoff agreement.

Determining which back taxes are dischargeable can be a little complex. However, it is possible to discharge significant income tax debt in bankruptcy, if your tax debt fits within the following rules:

The 3 Year, 2 Year, and 240 Day Rules. The Bankruptcy Code sets out specific time periods that determine if you can discharge your taxes, often called the 3-year, 2-year, and 240-day rules (or the 3-2-240 rules). Under these rules, you can discharge taxes that came due 3 years before filing for bankruptcy, as long as it has been at least 2 years since you filed the tax forms and 240 days since the taxes were assessed. These rules are often misunderstood. However, the important thing to understand is that you must meet the requirements of all three rules to discharge your taxes.

1. The 3-Year Rule. This rule states that to discharge your back income taxes, they must become due at least three years before you file for bankruptcy. B Typically, your federal and most state income taxes become due on or around April 15th of each year. In most cases, it is simply a matter of adding three years to this due date to determine the earliest date you can file for bankruptcy and still discharge your taxes.

Regardless of the initial due date, if you file for and receive an extension of time in which to file your taxes, the due date falls on the day the extension expires.

2. The 2-Year Rule. Under the 2-year rule, your income tax returns must have been filed at least two years before filing your bankruptcy petition. This requirement allows you to discharge your taxes, even if you filed your tax forms late, as long as you file them at least two years before filing for bankruptcy.

What if you did not file? If you did not file an income tax return in a given tax year, any taxes assessed by the IRS for that year are not dischargeable.

Quick Point: If the IRS files a return on your behalf, it is not considered a filed return for the purposes of this rule. You must still file a tax form for that year.

3. The 240-Day Rule. Taxes must be assessed at least 240 days before you file for bankruptcy under this rule or not assessed at all. As a practical matter, the date of assessment is typically on or near the date you filed your income tax form (assuming the IRS and you agree on the amount of taxes owed). However, if you file a correction or a change results from an IRS audit, the assessment date may be substantially later.

Carolyn Secor P.A. focuses its practice in the areas of Bankruptcy and Foreclosure Defense in Clearwater, Florida. For more information, go to our web site www.BankruptcyforTampa.com or call 727-254-1704.

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