Can tax debts be wiped out in bankruptcy? The short answer is generally “yes” provided
1. They are income tax and not some other kind of tax, 2. You filed the return, 3. They are old, and 4. You didn’t do anything to willfully evade the tax.
More specifically, income taxes that are more than three years old CAN be discharged, meaning erased. The three years begins on the due date of return, which is April 15 of the year following the tax year. (2012 income taxes were due April 15 of 2013.) If you filed an extension until October 15, you go by that date.
Here’s an example: You filed an extension for your 2012 tax, and filed an honest tax return on time on October 15, 2013. You file bankruptcy more than three years later, on October 20, 2016. The tax debt is most likely discharged.
If you file the income tax return late it gets a bit more complicated. If you file just a bit late the process usually still works, although the law is slowly changing to make it more difficult for the debtor to get relief. A recent case in our jurisdiction suggests that if you so delinquent that the IRS files a substitute return on your behalf, you probably cannot erase the debt. (Martin Smith, et al v. IRS, case number 14-15857, in the U.S. Court of Appeals for the Ninth Circuit.) Furthermore, it has always been the rule that if you never file the return, you can never discharge the debt.
The critical point here is: you should always file the return on time, even if you do not have the money to pay. Then set up a payment plan making the smallest payments possible. If more than three years go by and you are still unable to pay the debt, and you have to file bankruptcy, the tax should go away.
Do not apply for an offer in compromise, as this will extend the three-year period and undermine the process.
I have had many clients over the years do this without any issues. Typically they are self-employed real estate agents, contractors, or small business owners. Sometimes they are people working for wages that did not have enough of their income withheld. Most people are afraid of the IRS but in fact the people working there will usually simply apply the criteria I just outlined and erase the debt if the elements are satisfied.
This is just an outline of the general rules. If this is an issue in your life you should call me. I would be glad to discuss your situation with you free of charge. August Bullock (530) 961-3182