Tax Discharge in Bankruptcy

It is possible to get both federal and New York State tax bills discharged in bankruptcy?

It is a common misconception that taxes cannot be discharged in a bankruptcy proceeding. Most taxes are non-dischargeable, however, certain types of taxes will be forgiven through a bankruptcy proceeding.

The attorneys at the Law Office of Stephen B. Kass can guide you through the complex process of getting both your federal and New York State tax bills cleared.  We can help you file for Chapter 7 bankruptcy and fight through the red tape in order to clear your tax obligations.

Filing for Chapter 7 Bankruptcy and Obtaining a Tax Discharge

In order for an individual debtor who is interested in discharging their income tax debt by filing for a Chapter 7 bankruptcy, the debtor’s income taxes must meet the following requirements:

  1. The taxes debt is income based: The debt must be based on state or federal income taxes.
  2. The 3-year rule: The tax debt must be based on a tax return due at least 3 years before filing for bankruptcy.
  3. The 2-year rule: The debtor must have filed the tax return at least 2 years before filing for bankruptcy. A return is considered filed when the debtor signs off on the return.
  4. The 240-day rule: The feds or the state tax authority assessed the tax against the debtor at least 240 days before the filing of the bankruptcy. A tax is considered assessed when the liability is recorded on the authorities records. This time period may be prolonged if there is an offer to compromise between the debtor and the tax authority.
  5. There is no evidence of fraud or willful evasion: If the taxing authority can prove there was fraud involved in the preparing of the tax return or a willful attempt to evade paying the income tax, no discharge will be granted.

The New York State Department of Taxation and Finance follows the same rules and process as the federal tax discharge. Thus, these requirements apply to both state and federal income tax discharges.

In order to establish what income taxes may be dischargeable, it is advisable to begin by ordering an IRS tax transcript for the years you are attempting to discharge. Our attorneys can guide you in adequately preparing those orders.

Our attorneys can also help you if during your Chapter 7 case you are subjected to an adversary proceeding. An adversary proceeding is a separate lawsuit filed within the bankruptcy case usually to challenge a discharge of a debt. For example, in the case of a tax discharge, the taxing authority may file an adversary proceeding in order to prove up that a fraud was committed and prevent the income tax discharge.

The bottom line is that once you have obtained a Chapter 7 bankruptcy discharge and the income tax is deemed to be dischargeable, any personal income taxes owed for the years in question will be eliminated.

Since our firm also represents our New York consumer clients outside of bankruptcy we can also analyze for you and discuss the following alternatives:

Filing for Chapter 7 bankruptcy and attempting an income tax discharge are complex processes. For more than 15 years the Law Offices of Stephen B. Kass P.C. have offered their clients professional legal counseling in the area of bankruptcy. Contact our office today if you are in need of help or advice dealing with a bankruptcy issue.