Some debtors, besides their normal debts, also have unpaid tax debts that are owed to the Internal Revenue Service, the state, or a city. Some tax debts can be discharged through a bankruptcy filing, and some cannot. This page provides some information on this. However, if you are not sure, you will need to discuss your tax debts with counsel.
There are some debts that are labeled as tax debts that cannot be discharged under any circumstances. These are more accurately referred to as “trust” taxes, where you collect funds to hold “in trust” for another entity. This usually happens only if you are operating your own business. For instance, if your business sells goods and you charge buyers a sales tax, you are required to turn this amount over to the state or other entity that established the sales tax. If you have employees and you withhold from their wages for their federal, state, social security and medicare taxes, you are required to turn over those funds. Since you had no legal right to use these funds for your own purposes, any debt you owe for failing to turn these over is not dischargeable.
Some debtors I meet with inform me they have not filed federal or state income tax returns for one or more years in which they were required. They do this because they think they will owe tax, and they do not have the funds to pay it. Failing to file a return when due is not a good idea. Mainly, it is illegal to fail to file. Further, IRS penalties will accrue against you for failure to file, which would be IN ADDITION to interest on the unpaid tax. Failure to file may prevent you from being able to discharge the tax debt. (See later discussion on this page.) Finally, if you are going to file a bankruptcy petition, you are required to have already filed federal tax returns for the four years before the petition is filed, if required to do so, or your petition can be dismissed.
Some income taxes can be discharged. In general, you must meet each of the following criteria:
1) More than three years have passed since the return was due (including any extension).
2) More than two years have passed since the return was actually filed.
3) More than 240 days have passed since a tax debt was “assessed” by the taxing authority.
4) There was no fraud involved in the preparation and filing of the return.
5) You have not been determined to be willfully attempting to evade your taxes.
You or your attorney can obtain the above dates by completing and submitting to the IRS a copy of Form 4506-T, requesting an “account” transcript. http://www.irs.gov/pub/irs-pdf/f4506t.pdf Different state agencies have different procedures, you will need to contact your state taxing authority directly.
