It is possible to discharge income taxes in bankruptcy. As with most things in bankruptcy, the bankruptcy code is where to find the answer.
The dischargeability of income taxes is covered in two interconnected portions of the bankruptcy code. 11 U.S.C. §523(a)(1) and 11 U.S.C. §507(a)(8)(A) combine to create the following rules for discharging income taxes in bankruptcy:
1. The income taxes must have become due at least 3 years prior to the bankruptcy filing. Federal income taxes are due in April (usually April 15th). Here in California, the Franchise Tax Board has the same due date. Don’t forget about extensions, however. For federal taxes, you must apply for the extension and the due date can be extended to October. For the Franchise Tax Board, the taxpayer does not need to apply as the extension to October is automatic.
2. The debtor in the bankruptcy case must have actually filed the tax return(s) at least two years prior to the bankruptcy filing.
3. At least 240 days must have passed since the taxes were assessed. This can be determined by ordering a tax account transcript for the tax year(s) in question.
If the taxes meet those three requirements, then they should be dischargeable in a bankruptcy case. The bankruptcy code also contains a provision that any taxes resulting from a fraudulently filed tax return or an attempt to evade taxation will remain non-dischargeable even if they otherwise meet the requirements above.
There is a rare minority view in the 5th circuit that a late filed return by a bankruptcy Debtor did not qualify as a “return” as it was not timely filed (essentially making all late filed taxes permanently non-dischargeable). Thankfully, this view of income tax dischargeability is isolated, and doesn’t seem to be one that other Courts are picking up. To date, no 9th Circuit (here in California we’re in the 9th Circuit) bankruptcy Court has agreed with this view.
To find out if specific taxes may be eligible for discharge in a bankruptcy case, speak with a qualified bankruptcy attorney.