These days it seems as if you can’t turn on the television, flip open the newspaper, or surf the web without running into an advertisement for bankruptcy lawyers. For people in tough financial circumstances, bankruptcy can seem like a magical solution for all of your financial problems. Advertisements tout the marvel of having all of your debts dissolved – even outstanding tax obligations!

Is this true? Can declaring bankruptcy erase your tax obligations to the IRS or state taxing agency?

The answer is a qualified “it depends”. Before you decide to go forward with filing for bankruptcy, you need to get accurate information about your tax problems and whether or not they can be resolved more favorably through filing bankruptcy. There are alternate ways to handling outstanding tax debts, tax levies and wage garnishments without the need to file bankruptcy. Sometimes these alternate methods get a better result than by filing bankruptcy. Other times bankruptcy is the better alternative. It really depends on the facts of each person’s case since each person’s case is different. Having someone who is well versed in resolving tax problems analyze your case will allow you to choose the most favorable option to resolve your tax problems.

Bankruptcy is not always the easy fix-it that the advertisements promise in many cases. Many people with outstanding tax issues have been shocked to find out that they’ve gone through the pain, stress, and never-ending paperwork of a bankruptcy only to discover that they still owe the IRS and state taxing agency every penny – and now there are additional penalties and interest involved!

Qualified Tax Professionals

A bankruptcy attorney (or bankruptcy specialist, as they are often called) has many qualifications, but there’s something you should know. Generally, these people do not specialize in tax law or resolving tax problems. They’re not tax accountants, CPA’s, or focused on successfully resolving your tax problems. They focus on bankruptcy.
Here’s the truth of the situation. Certain types of federal and state tax debts may be discharged under the bankruptcy code. Other types are not dischargeable under the bankruptcy code. Ever. Knowing the difference between the two is critical in deciding whether or not filing a petition for bankruptcy is an option. Those types of taxes that can be dischargeable in bankruptcy must also meet three critical timing rules before they can be dischargeable in a bankruptcy proceeding.

The first rule states that the bankruptcy petition must be filed more than 3 years from the due date of the tax return, including extensions. However, caution should be taken in determining whether this rule has been met as there are several actions that can lengthen this 3 year time period and require you wait longer than 3 years from the due date of the returns. Determining whether any actions have taken place that could have lengthened this time period is critical in knowing whether this rule has been met.

The second rule states that the bankruptcy petition must be filed more than 2 years from the date the tax returns were filed. Only the filing of an original tax return can start the 2 year time period running. A substitute tax return, or SFR, filed by the IRS or state taxing agency does not qualify. As with the 3 year rule, certain actions can lengthen this 2 year time period. Therefore, determining when the original tax return was filed and whether or not anything has extended this 2 year time period is critical in knowing whether this rule has been met.

The third rule states that the bankruptcy petition must be filed more than 240 days from the date of assessment. Bear in mind that there can be multiple assessment dates for a given tax year where the IRS or state tax agency has audited or adjusted the original tax return amount or an amended tax return showing an additional balance due has been filed by the person filing bankruptcy. Therefore, determining all of the appropriate assessment dates for each tax year is critical. As with the first two rules, some actions can lengthen the 240 day time period. Determining whether anything has extended this time period is critical before filing the bankruptcy petition.

Lastly, the tax returns filed cannot be fraudulent and the person cannot have willfully attempted to evade or defeat the taxes owed.

If you have outstanding tax debt and are considering filing bankruptcy, consult with tax experts first! A qualified tax expert who resolves tax problems full time will know how to analyze whether your taxes can be discharged now or at some date in the near future and help you avoid costly mistakes. Bankruptcy can solve some financial problems, but to discharge taxes in bankruptcy you must meet the above rules as well as certain financial conditions the court requires to qualify to file for bankruptcy.

Although bankruptcy can sometimes be a solution, it isn’t always a solution. Make sure the tax expert you select has knowledge of the above rules. Interview and question any attorney you select to file your bankruptcy petition about the above rules. If they cannot tell you the basic rules, run don’t walk to another attorney! I have seen too many supposed bankruptcy attorneys file bankruptcy for someone, not knowing the basic rules, and after the bankruptcy is over, their client still has the same tax problem they did when they first filed. Don’t make that mistake. Make sure your attorney is qualified and knows what they are doing.