Tax Filing After a Bankruptcy

It is everyone’s favorite time of year – the dreaded tax season. Did you know filing bankruptcy can have an effect on your taxes? The common beliefs are federal, state, and local income taxes are not dischargeable. This is not the case; the penalties and interest accrued for these taxes can also be released as well. This process can be a severe and lengthy practice. There are steps you can take to entrust the legality of bankruptcy and your taxes.

Three Years, Two Years, and Two Hundred and Forty Day Rule

The code, Three Years, Two Years, and Two Hundred and Forty Day, is particular bankruptcy to determine the length of time you can discharge your taxes. You are allowed to discharge income taxes that came due three years before filing for bankruptcy, but it must be at least two years since you filed the tax forms and 240 days since the taxes were calculated. There are exceptions and additions to this rule:

  • Amended or Corrected Returns – If there are uncertainties on your tax return or if you are in dispute with the IRS you should tell your bankruptcy lawyer about the dispute before your file.
  • Tolling – Some actions suspend time periods under this law including obtaining taxpayer assistance, prior bankruptcies, or an offer that is in negations.

Priority income tax debt is unsecured that does not fall under the 3-2-240 rules. Other priority debts include certain government charges, child support, maintenance, etc. These are non-dischargeable in bankruptcy.

Interest and Penalties

Interest and penalties are often treated the same as Chapter 7 and Chapter 13. However, some difference may apply:

  • If Tax penalties more than three years old are dischargeable unless the IRS or other taxing agency has secured the debt by filing a tax lien.
  • If the taxes are dischargeable, the interest is dischargeable as well.
  • In Chapter 7, penalties and interest on priority tax debts are not dischargeable.
  • In Chapter 13, penalties and post-petition interest are discharged, if the debtor completes the Chapter 13 plan.
  • Interest and penalties on secured tax debt are not dischargeable up to the value of the security interest in the debtor’s property.
  • Taxing agencies may be entitled to post-petition interest on secured tax debt, which the debtor must pay as part of the plan in a Chapter 13 case.

The laws surrounding bankruptcy regarding discharging of debts can be complicated. It is best to consult a bankruptcy attorney when considering the options for bankruptcy and to be informed about your tax ramifications. AM Law can help guide you through this process. Call today to speak with a trusted advisor who can help evaluate your options.