Tax Minute
DISCHARGE OF TAXES IN BANKRUPTCY
The bankruptcy code generally allows for a discharge of income taxes that are more than 3 years old. In a recent tax minute, I let you know that if you have a late filed Massachusetts income tax return, this is not considered a return for purposes of bankruptcy and the taxes due on that late filed tax return will not be dischargeable in bankruptcy. In another blow to taxpayers that are trying to get taxes discharged in bankruptcy, in a recent case, taxes owed to the IRS were not dischargeable because the taxpayer did not make an "honest and reasonable attempt" to follow the law. In this case, the taxpayer failed to file a tax return and several years after the due date, the IRS assessed a tax return based on the information that was reported to it by third party payers. After the assessment, the taxpayer filed an original Form 1040 to replace this substitute for return and this 1040 increased the amount of tax that the taxpayer owed. The taxpayer filed for bankruptcy and the additional taxes as a result of his filing were dischargeable, however, the assessment that was made by the IRS was not dischargeable in the bankruptcy. This decision was later upheld by the Court of Appeals. If the IRS has assessed income taxes against you because of your failure to file taxes and you are thinking about bankruptcy, think again. Instead, I suggest you call me on the Tax Line to see if an Offer-in-Compromise, which is where you can settle your tax debt for less than you owe, is a viable option.