DISCHARGING PERSONAL INCOME TAXES

This information sheet is a very basic overview of the rules governing dischargeability of personal income taxes and information on how to obtain your IRS transcripts. It is for the reader’s general information and not intended to be legal advice.

PERSONAL INCOME TAXES:
Income taxes are dischargeable through bankruptcy if they are not “priority” taxes as defined in Bankruptcy Code section 507(a)(8). There are three independent rules to test when taxes are not dischargeable. They are not dischargeable:
A.) When the bankruptcy petition is filed within three (3) years of the due date of the return, including extensions;
B.) Where the bankruptcy petition is filed within 240 days of the assessment of the tax; or, where an “offer in compromise” have been submitted within 240 days of the assessment date PLUS the period when the offer in compromise was pending PLUS 30 days;
C.) Where the tax remains assessable AND the tax relates to other than either a non-filed tax return or a delinquent return filed within two (2) years of the filing of a bankruptcy petition or relates to a fraudulent return.

Taxes owed from years in which a return was not filed are not dischargeable. Taxes due from a return which was filed after the due date (including extensions) within two (2) years of the date of the filing of the bankruptcy petition are not dischargeable.
Fraudulent returns or willful evasion causes the tax to be non-dischargeable.

TAX LIENS:
A lien filed by the government survives bankruptcy. It attaches to your real property, or other personal property such as 401k’s and ERISA’s, etc. The lien remains regardless of whether the property is exempt or not. When you file a bankruptcy petition, your personal responsibility for paying the tax debt may be discharged (see above) but the lien will remain and you must, at some point in the future (after discharge), negotiate for a release of lien at a lower amount than originally owed.

GETTING THE INFORMATION:
Prior to filing a bankruptcy petition, you should contact the IRS and request a transcript. Ask for a “MFRTA-X” printout for all potential years in which you believe you may owe taxes. You may obtain this document by writing to: IRS, P.O. Box 30210, Laguna Niguel, CA 92607, or by going in person to 880 Front Street, San Diego, CA 92101. Provide a copy of the transcript to your lawyer. Also, provide your lawyer with copies of ALL written communications between you and the IRS.


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