If you owe back taxes, today could be the worst day to file a bankruptcy case

Lets say you owe back income taxes for a number of years, and are interested in whether filing for bankruptcy will cure (or at least alleviate) the problem.

Fair enough, but before you rush off to bankruptcy court, or even to a bankruptcy lawyer, slow down a minute!

Income taxes are dischargeable only if a bankruptcy case is filed more than three years after the tax return was due. So if you owe taxes to the IRS or Mass. DOR for tax year 2008, today could be one of the worst times to file a bankruptcy case — you would be making sure that your 2008 tax bill was NOT discharged by the court.

Do the math: 2008 taxes were due on April 15, 2009. Add three years to that, and April 15, 2012 becomes the magic date after which you can wipe out that year’s tax bill. Filing your case in February, March, or early April could be a big mistake — and an expensive one.

And don’t forget one tricky “catch” to the rules: the three year period is calculated from either the due date of the return OR the date you actually filed the return. So if you got an extension back in 2009, and filed sometime in September or October, lets say, you have to wait until the fall of this year to discharge 2008 taxes. It is usually a good idea to buy a transcript of your tax from the IRS, to see what they have to say about when the forms were really filed. A hazy memory could hurt you here!

Of course, if you owe income taxes from 2007 and before, the three year waiting period has already gone by, and there is no penalty to filing your case right now — as Ernie Boch used to say, just “come on down!”

If you have any questions about whether a particular tax is dischargeable in bankruptcy, just give me a call.


By Doug Beaton

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