When you file for chapter 7 bankruptcy, most, if not all, of your unsecured debt will be discharged. (Read more about dischargeability of your debts.) However, one type of unsecured debt that may not be discharged are the back taxes that you owe to the Internal Revenue Service (IRS) and/or the Franchise Tax Board (FTB). As the common saying goes, "Nothing is certain but death and taxes."
BUT, there are some special circumstances that may allow your back taxes to be discharged in a chapter 7 bankruptcy. If the back taxes you owe meet the following criteria, they will be treated like any other type of unsecured non-priority debt, and be discharged at the conclusion of your chapter 7 bankruptcy. You must pass each "test" to ensure that the back taxes will be discharged.
- The back taxes owed must be INCOME taxes (not sales tax or property tax)
- The due date for filing the tax return was AT LEAST 3 years ago (including all valid extensions)
- The tax return was filed AT LEAST 2 years ago BEFORE the filing of the bankruptcy case
- A tax return is considered to be "filed" when the government RECEIVES the return, not when it is mailed out.
- The taxes have NOT been assessed within the past 240 days.
- A tax assessment is when the IRS or FTB enters your tax liability on their records. Before making an assessment, the IRS will send you a notice of deficiency, at which point you have 90 days to contest it or ask for a redetermination of that tax deficiency. If you do not file for a redetermination within those 90 days, the IRS can then assess your taxes. The official assessment date is when the assessment officer signs the summary record of assessment. For California state taxes, they are "assessed" when they actually become final.
- The tax return was not fraudulent.
- The taxpayer is not guilty of tax evasion.
As long as the back taxes meet the above criteria, they will be discharged in your chapter 7 bankruptcy. The best way to see if you meet the criteria is to obtain a tax transcript from the IRS and FTB. The transcript will show the outstanding liabilities by year, and also list filing dates, assessment dates, extension dates, and penalties and interest owed.
Since there are a lot of different criteria, be sure to meet with a bankruptcy attorney to ensure that the taxes will actually be discharged. Contact Atlantis Law LLP to meet with an attorney for a free consultation, and get rid of those nagging back taxes. We have filed hundreds of cases in San Bernardino and Riverside County, and every single one has successfully received a discharge. We are proud of our 100% success rate in helping families in and around Rancho Cucamonga.