Discharging Taxes in Chapter 7 Bankruptcy

It may surprise some that your past due and unpaid income taxes can be discharged in a Chapter 7 or liquidation bankruptcy.

In the example below, a person wants to eliminate or discharge their 2011 taxes in a bankruptcy.

The person files their bankruptcy petition on April 17, 2015. In order for an old tax debt to be discharged, four conditions must be met.

1. The taxes must have been due at least three years prior to the filing of your bankruptcy petition. To be clear, remember that taxes are due on April 15 (later if the 15th falls on a weekend or holiday). So, for a 2011 tax year the taxes ARE DUE APRIL 16, 2012, because April 15, 2012 is a Sunday.
   Add three years from April 16, 2012 and you know that you cannot discharge the 2011 taxes until April 17, 2015.
   

2. Condition number two requires that you must have filed your return at least two years before filing your bankruptcy petition. In this case that would mean that you would have to have filed your 2011 tax return by April 16, 2013 which is at least two years before April 17, 2015. If you filed your 2011 return on or before April 16, 2013,, then for your unpaid 2011 taxes you would meat condition 1. and 2.
   

3. The third condition requires that there cannot have been a recent assessment of your taxes (changing the amount of the taxes that were originally due) within 240 days of filing your bankruptcy petition and that the taxing agency did not suspend collection activities. Another way to think about this condition is whether the IRS or your State internal revenue service did an audit and changed the amount owed within 240 days of filing your bankruptcy petition. In this example no audit or recent assessment was done. Interest and penalties do not count as a recent assessment.
   

4. The last condition requires that your tax returns be properly signed and dated.
   If all of the above conditions are satisfied, a person can eliminate or discharge their state and federal income taxes through a Chapter 7 bankruptcy as set forth in this example.