Bankruptcy and Tax Debts

One of the biggest issues on people's minds when considering filing for bankruptcy protection is what will happen to their tax debts. The answer, like most things related to taxation, is as clear as well the Mets' chances of making it to the World Series this year. It can happen, but a lot needs to fall into place.

Let's tackle the easy ones first, taxes that are non-dischargeable. The first item is called trust fund taxes. This grouping of taxes is tied to monies that you collected on the government's behalf, the most common being payroll withholding and sales taxes. Included in this group are also property taxes payable within one year of filing for protection, excise taxes, customs duties and certain penalties. Finally, thrown in for good measure, is income or gross receipts taxes for the taxable year ending on or before the filing of the petition.

Before we go any further, it should be immediately evident that you need to know what you're dealing with. What taxes are you responsible for, whether or not filed? What returns have been filed and when? What taxes have been paid and when? Were the returns accurate (i.e. no fraud)? Has the IRS filed a federal tax lien? Has the statute of limitations been extended? Accordingly, step one is to request transcripts from the IRS to confirm the facts, followed by confirming that all tax compliance is up-to-date.

Assuming that we can clear the hurdles above and the tax obligations relate to income taxes, there is some hope for discharge in whole or part depending on the chapter of the bankruptcy code you have filed under.

The following describes the relevant situations where taxes can be discharged:

1. Income Taxes greater than three years prior to the filing
   Income taxes and taxes measured by income that were due greater than three years prior to the filing for protection can be discharged.
The critical factor here is the date the taxes were due; extensions need to be factored in.
2. Taxes assessed within 240 days of filing
   This will deal with late-filed taxes, taxes under audit and situations where the statute of limitations may have been extended. The tax must have been assessed greater than 240 days prior to filing to be dischargeable.
3. Late-filed tax returns
   Late-filed tax returns can be discharged if they were filed more than two years prior to the filing for protection.

Naturally, there are nuances to every rule. A thorough review of tax matters needs to be taken prior to filing for protection in order to achieve the desired discharge.

Please contact a member of WS+B's Bankruptcy and Insolvency Group for further questions or assistance.