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Contrary to what many people may believe, it is possible to wipe out tax debts in a Chapter 7 or Chapter 13 bankruptcy. Federal law sets several strict criteria that focus first on the government’s efforts to collect unpaid taxes, and then on the debtor’s adherence to tax regulations and procedures. This applies in both Chapter 7 and Chapter 13 bankruptcy cases. To be eligible for discharge, the tax debt must meet the following five criteria.

1. The Tax Due Date Must Be More Than Three Years Before the Bankruptcy Filing Date.

Tax debt is considered non-dischargeable priority debt, unless the debtor files for bankruptcy more than three years after the tax comes due. 11 U.S.C. §§ 507(a)(8)(A)(i), 523(a)(1)(A). This three-year period is known as a “lookback period,” which is similar to a statute of limitations. As the Supreme Court noted in Lozano v. Montoya Alvarez, 134 S.Ct. 1224, 1234 (2014), if the government “‘sleeps on its rights’ by failing to prosecute those claims within three years, however, those mechanisms for enforcing claims against bankrupt taxpayers are eliminated.”

2. The Tax Assessment Must Be at Least 240 Days Old.

The lookback period for tax debt has a second component. Tax debt is only dischargeable in bankruptcy cases filed more than 240 days after the government makes a tax assessment. 11 U.S.C. §§ 523(a)(1)(A), 507(a)(8)(A)(ii). The bankruptcy laws enacted in 2005 closed a loophole that had allowed debtors to take advantage of the automatic stay in a bankruptcy case to stop collection action by the IRS. Holland v. Florida, 130 S.Ct. 2549, 2570 n. 3 (2010), citing Young v. United States, 535 U.S. 43, 50-51 (2002).

3. The Debtor Must Have Filed the Tax Return at Least Two Years Before Filing Bankruptcy.

A debtor cannot discharge a tax debt unless they filed a return for the applicable tax year at least two years before filing a bankruptcy petition. 11 U.S.C. § 523(a)(1)(B). This provision does not specifically address whether or not the debtor filed the tax return on time. Federal appellate courts have reached inconsistent rulings regarding whether a late-filed return qualifies under the Bankruptcy Code. A California bankruptcy court took the position that a return qualifies if the debtor filed it after the due date, but before any IRS assessment. In re Pitts, 497 B.R. 73, 81 (Bankr. C.D. Cal. 2013), citing In re Brown, 489 B.R. 1, 5-6 (Bankr. D. Mass. 2013).

4. The Debtor Must Not Have Committed Tax Fraud.

If the debtor submitted a fraudulent return, the tax debt is not dischargeable. 11 U.S.C. § 523(a)(1)(C). The statute does not require a conviction for tax fraud under 26 U.S.C. § 7207 or any related statute.

5. The Debtor Must Not Have Committed Tax Evasion.

If the IRS was unable to collect the debt because the debtor was attempting “to evade or defeat such tax,” 11 U.S.C. § 523(a)(1)(C), discharge is not available. Again, a conviction under a statute such as 26 U.S.C. § 7201 is not required.

Bankruptcy attorney Devin Sawdayi has represented people in the Los Angeles area in Chapter 7 and Chapter 13 bankruptcies since 1997, helping them rebuild their finances with dignity and respect. To schedule a free and confidential consultation to discuss your case, please contact us today online or at (310) 475-939.

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