Dischargeability of Tax Debt in Bankruptcy

Dischargeability of Tax Debts in Bankruptcy

The following tax debts are not dischargeable:

1. Fraud, evasion (fraud penalties, as opposed to negligence penalties, would appear on the transcript).

2. Debt for on business payroll withholding tax (does not include employer portion of FICA) or state sales tax.

3. Debt for a tax year whose return was due (including any extension) less than 3 years before bankruptcy filed (date actually filed irrelevant).

4. Debt for tax assessed within 180 days before bankruptcy was filed, plus, if an offer in compromise was pending during that period, the days it was pending plus ___ days.

5. Debt for tax years as to which the return was filed within 2 years before bankruptcy was filed.

6. Debts to the IRS for tax years as to which the IRS has filed a “substitute for return” (SFR).

7. Debts for tax years as to which the return was filed late. In re Mallo, 2014 WL 7360130 (10th Cir. Dec. 29, 2014). This exception to discharge is the subject of vigorous ongoing debate and is certain to find itself in the United States Supreme Court sooner of later. The 10th Circuit’s holding was even more pro-IRS that the IRS’s position, which was that the mere late filing of a tax return (barring difficulties with other rules) should prevent discharge only if an SFR was filed.

The 3-year period, and possibly other tax-dischargeability periods, are tolled by the pendency of a bankruptcy and by the pendency of a “collection due process” (CDP) hearing, plus 90 or 180 days.

It is possible that a debt is not priority but also not dischargeable (e.g., tax return filed less than 2 years ago for a tax year whose return was due more than 3 years ago).

Tax liens are not affected by bankruptcy except in a chapter 13, 11, or 12 plan.

Federal tax transcripts are available at http://www.irs.gov/individuals/get-transcript (or at least that was the case until the IRS’s website was hacked in May 2015).

State tax return and tax debt information is available by faxing a tax status request form to Oklahoma Tax Commission at 918-581-2087 (for Northern and Eastern District). It must be signed by the debtor and state his social security number and name. The OTC will provide the form on request.