It is often said there are two certainties in life: death and taxes. If you believe this to be true, you probably also understand how stressful it can be to owe tax debts to the government. There are limited options when the IRS is after you, even though Nevada residents are fortunate enough to not be liable for state income taxes. Even with bankruptcy, the most powerful form of debt relief, there are limitations to eliminating tax debts in both chapter 7 and chapter 13 cases. Whether or not your tax debts are eligible for discharge could be a huge factor in your decision in whether or not to file for bankruptcy. The good news is that you don’t have to come to a conclusion on this decision on your own. Our firm offers free consultations by phone so you can learn more about bankruptcy from the comfort of your own home. Get started today by calling 702-899-3328.
Taxes as Priority Debt
Debts are classified into separate categories that are treated differently under the law. Tax debts always start out as priority debts, although they can eventually meet requirements that make them unsecured debts. But when taxes are priority debts, they can’t be erased in bankruptcy like unsecured debts can. Chapter 7 won’t clear priority tax debt, although it can temporarily stop some collection efforts on these debts, such as a wage garnishment. Debtors have 3 or 5 years to pay off their debts, including priority tax debt, in chapter 13 bankruptcy, with any remaining unsecured debts being cleared at the end. So as long as taxes remain priority debts, filing for bankruptcy is not a get-out-of-jail free card for a debtor who owes to the IRS. But older tax debts do have the potential for dischargeability in bankruptcy- read on for more on this. When certain conditions are met, tax debts become unsecured, meaning they can be wiped out by chapter 7 bankruptcy and are only paid to the extent the debtor can afford in chapter 13 bankruptcy.
What is the Three-Year Rule for Tax Debt?
The three-year rule is the highest time length requirement that must be met for tax debt to be considered unsecured and therefore dischargeable in bankruptcy. The three-year rule applies to how long the taxes must have been due. This is calculated from April 15 on the year they were due, including any valid extensions that were applied. The date for the three-year rule will always fall on April 15 unless the debtor requested and received an extension. So if you are seeking to discharge tax debt this year, it must have been from 2023 or before, or it will still hold priority status and be protected from a bankruptcy filing.
What is the Two-Year Rule for Tax Debt?
The two-year rule is the next requirement that must be met for tax debt to lose its priority status and become dischargeable in bankruptcy. This rule refers to how long ago the tax returns were filed, rather than when they were due. This date can fall on any day from the first of the year until April 15, unless the debtor received an extension on their tax return. So if the debtor owes taxes due in 2022 that were filed on March 30, 2022, that debt met the two-year rule on March 30, 2024. However, it wouldn’t have met the three-year rule until April 15, 2025. If the debtor owes taxes due in 2023 that were filed late, let’s say June 30 of 2024, the three-year rule was met on April 15, 2026, but the two-year rule wasn’t met until June 30, 2026. If a debtor has always filed their taxes on time, the two-year rule shouldn’t affect their eligibility to clear tax debts in bankruptcy. In some instances, when someone doesn’t file their taxes, the IRS will file an SFR, or Substitute for Return, on that person’s behalf. The SFR does not count as a filing for purposes of the two-year rule, and that person will need to file their own tax return to start running the clock towards tax debt dischargeability.
What is the 240-Day Rule for Tax Debt?
The 240-day rule for tax debts refers to how long it has been since a tax debt was assessed. The assessment is when the IRS formally logs that person’s tax liability. This must have occurred at least 240 days, or approximately 8 months, before that person files for bankruptcy for the debt to lose its priority status. This rule can come into play if the debtor severely delayed filing their tax returns. The clock for the 240-day rule pauses if the person files an Offer in Compromise, or OIC, or filed a previous bankruptcy during that time.
Other Critical Disqualifiers for Tax Debt in Bankruptcy
Time-wise, tax debt must be due 3 years, filed 2 years, and assessed 240 days before a bankruptcy petition is filed if the debtor wishes to include that debt in their discharge. But there is still another hurdle that must be cleared before tax debt loses priority status, becoming unsecured and thus eligible for bankruptcy discharge. There should be no applicable critical disqualifiers for the tax debt, or they will never lose their priority status, no matter how old they are. Those critical disqualifiers are:
- Fraud: There are a wide variety of ways that a person can engage in tax fraud, but all of them will make that person’s tax debt nondischargeable in bankruptcy if discovered by the IRS. Examples including purposely hiding income and using a fake Social Security number.
- Evasion: Like fraud, evasion will freeze tax debts in priority status forever.
- Tax liens: Bankruptcy clears a personal obligation to pay a debt, but if the government has already filed a lien on that person’s property, it will not be cleared by bankruptcy. Liens are secured debts, so the debtor either needs to pay the debt separately or use chapter 13 to pay it off in a plan once tax debts have proceeded to this stage.
- Non-income taxes: Bankruptcy can only clear income tax debts. Payroll (trust fund) taxes, excise taxes, penalties, etc., aren’t cleared by filing for bankruptcy. This factor might be more relevant for residents of Nevada, who aren’t liable for state income taxes.
Review Your Tax Debt Dischargeability with an Experienced Henderson Bankruptcy Lawyer
More often than not, complex issues like tax debts in bankruptcy aren’t cut and dry. It can be difficult for someone without specialized bankruptcy experience to discern whether or not their tax debt can be cleared by bankruptcy, which could have a huge bearing on whether it’s worth it to file. You don’t have to figure this question out on your own, and you don’t have to come out of pocket for assistance in doing so. Our Henderson bankruptcy lawyers offer free consultations by phone to inform you about the bankruptcy basics and make sure you’re eligible. If you are, you’ll receive a competitive quote for our legal services with flexible payment plan options available. Learn more today by scheduling your free consultation at 702-899-3328 for more information.
Henderson Bankruptcy Attorneys
1489 W. Warm Springs Rd., Ste. 110
Henderson, NV 89014
Phone: (702) 899-3328
Email: [email protected]
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