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Can I Wipe out Income Taxes by Filing for Bankruptcy?

Feb. 28, 2021

When I first started practicing bankruptcy law, I figured that people were not permitted to wipe out their old income taxes by filing for bankruptcy. I soon learned that my assumption was quite incorrect, and I'm glad I was wrong, because over my 47 years of practicing law I have helped a whole lot of people wipe out thousands and thousands of dollars they have owed to the IRS and the State of New Jersey. As a result, I've had many very happy clients who have often referred friends and family members to our firm.

There are some important rather complex rules as to when you can and when you can't wipe out old income taxes, and for purposes of this blog, I'm going to do my best to keep it as simple as I possibly can.

  1. First of all, you can't wipe out income taxes for this year, or for last year, or the year before that. The first important rule says that the most recent due date for the tax year you are trying to wipe out must be more than three years ago. This rule will be very easy to understand once I give you an example, so here it is.

    Let's say my client Fred owes the IRS $10,000 for the year 2016, and boy would he love to get out of that debt. Fred's 2016 tax return was due on April 15, 2017, so that's the date we start with. Next, we add 3 years, and we get April 15, 2020. Since it's now well past April 15, 2020, I tell Fred, "Congratulations, that's great, you qualify under what I call the 3 Year Rule. So far so good, but there are still a couple of more rules you have to comply with to get these taxes wiped out."

    If Fred wanted to wipe out income taxes for the year 2017, he'd have to wait until at least April 15, 2021 to file for bankruptcy.

  2. Now let's now move on to the second rule, which I call the 2 Year Rule. The 2 Year Rule is only important if you filed your tax return late. If you filed on time, you don't have to worry about the 2 Year Rule at all. The 2 Year Rule requires that the tax return for the tax year you are trying to wipe out was filed at least two years before your bankruptcy case was filed. So let's say Fred's tax return was filed on February 19, 2019. To wipe out his taxes, Fred would have to file his bankruptcy case on or after February 20, 2021. But if Fred hadn't filed his taxes until October 25, 2019, he'd have to wait until at least October 26, 2021 to qulaify under the 2 Year Rule.

    For purposes of the 2 Year Rule, the important issue is the actual date that the tax return was filed. The good news for Fred is that he filed his 2016 tax return in 2018, so it's definitely more than 2 years ago, and Fred has so far qualified to wipe out his $10,000 tax debt, but we still have to tell Fred about the third rule.

  3. The third rule is called the 240 Day Rule. The 240 Day Rule says that the tax that you want to wipe out was assessed by the IRS or the State of New Jersey more than 240 days before your bankruptcy petition is filed. If you obtain a transcript of your taxes from the IRS, that transcript should relect the date of assessment of the tax for the year you want to wipe out.

There are some exceptions to these rules as to the way the time might be calculated. For example if you applied with the IRS for an Offer in Compromise, or if you previously filed for bankruptcy, the amount of time you'd have to wait would probably be longer than what we have stated. We're not going to go into those exceptions here because we wanted to keep it as simple as possible.

There are also a couple of other special rules that apply to people who have committed tax fraud or tax evasion, and those rules would not apply to our typical honest clients who have just gotten too far into debt, and want to do what they are legally permitted to do to wipe out their bills, including their old income taxes.

So if you want to wipe out old income taxes, we'll be happy to give you a totally free consultation, and once we know and understand all of the pertinent facts and details as they apply to your situation, we should be able to figure out which taxes can be wiped out and which taxes cannot be wiped out. If you need our help, feel free to call us at any time.