Dischargeability of taxes in bankruptcy

In these troubled economic times, we're getting calls from many potential clients who owe money to the IRS and other taxing authorities. They're seeking our counsel about whether their taxes are dischargeable in bankruptcy or a strategy for dealing with their tax liabilities. Some advice and strategies for the discharge of taxes in bankruptcy are provided below.

1. Trust fund taxes (money withheld from an employee's wages (income tax, social security, and Medicare taxes) by an employer and held in trust until paid to the Treasury) and sales taxes are not dischargeable in bankruptcy.

2. So called "old income taxes" for which (i) the tax return was filed more than two years before the bankruptcy filing, (ii) the tax was due more than three years before the bankruptcy filing and (iii) the tax was assessed more than 240 days before the filing of the bankruptcy petition can be discharged in bankruptcy.

3. Taxpayers should file their income tax returns on a timely basis, whether or not they can pay the tax that is due.

4. Never file a fraudulent tax return-fraudulently filed tax returns aren't dischargeable in bankruptcy.

5. If a taxpayer didn't timely file income tax returns for several years and then did a "batch filing" of returns for multiple years, the IRS or other taxing authorities can argue that these batch filings were "an attempt to evade or defeat the tax" and taxes for those years may not be dischargeable, according to both the Bankruptcy Code and case law.

6. A determination of what taxes may be dischargeable in bankruptcy begins with a review of a taxpayer's tax transcript, the types of taxes that are due and the dates the taxes were assessed.

Please note that the interrelationship of taxes and bankruptcy law is quite complex and requires experienced counsel. The general guidelines listed above should not be construed as legal advice for your particular circumstances. Anyone who has questions concerning the dischargeability of taxes in bankruptcy should contact Jim Shenwick.