Can Bankruptcy Eliminate Old Tax Debt, To The IRS Or The State?

Tax liabilities are complicated outside of bankruptcy.  Put bankruptcy into the mix and they become even more complicated.  That said, there are some general rules regarding discharging taxes in bankruptcy, commonly referred to as the “3-year, 2-year, 240 day rule” by bankruptcy professionals.  This is a three-prong test of tax liabilities and all three prongs must be met in order for the tax liability to be discharged.

First, the tax return due date, including any extensions granted by the taxing authority, must be at least three years before the date of the bankruptcy filing.  Second, the tax return must have been filed at least two years before the date of the bankruptcy filing.  Third, the tax debt must have been assessed at least 240 days before the date of the bankruptcy filing.  

Even if you meet the “3-year, 2-year, 240 day rule”, there are situations where the taxes will still not be discharged.  You must have filed the tax return for the tax year in question.  If no return was filed, the tax liability is not discharged.  You must not have attempted to willfully evade the tax liability, often by filing an inaccurate tax return intentionally.  The tax must be an income tax.  If you have a trust fund tax, such as a payroll or withholding tax that you should have been paying for an employee and failed to do so, the tax obligation is not subject to the discharge.