Timing Rules

Income tax bankruptcy is all about timing. There are three rules that must be satisfied, in the proper order, for taxes to be discharged in bankruptcy.

1. The Three Year Rule
2. The Two year Rule
3. The 240 Day Rule

The Three Year Rule:

The bankruptcy must be filed more than three years after the return was due to be filed (including timely filed extensions).

Example: A tax return filed for tax year 2010 was due (without extension) on 18 April 2011 and would be eligible under this rule to be discharged in bankruptcy on 19 April 2014.

If an extension was filed giving the taxpayer until 17 October 2011 to file the return the taxes would be eligible to be discharged on 18 October 2014.

The Two Year Rule:

The bankruptcy must also be filed more than two years after the tax return was actually filed in addition to the three year rule. The taxpayer must pass both tests.

Example: The 2010 tax return was due to be filed on 18 April 2011. It was actually filed on 10 June 2013. The tax liability would not be eligible for discharge by bankruptcy until at least 11 June 2015.

The 240 Day Rule:

The last rule to be followed is the 240 day rule. The bankruptcy can not be filed until more than 240 days has elapsed from the date the tax was assessed. This is usually done in an audit or exam situation where returns have been filed and are then audited and additional tax is assessed after the original filing/due date.

Example: Our taxpayer with the 2010 tax return above, which he filed on 10 June 2013, was audited by the IRS and had additional taxes assessed on 15 April 2014. His 240 day mark is 11 Dec 2014, therefore, he can not attempt to discharge the taxes in bankruptcy until at least 12 Dec 2014.

Lets look at an example using the dates we have discussed on the chart below.

1. A tax return filed for tax year 2010 was due (without extension) on 18 April 2011 and would be eligible under this rule to be discharged in bankruptcy on 19 April 2014.

2. The return was actually filed on 10 June 2013. The tax liability would not be eligible for discharge by bankruptcy until at least 11 June 2015.

3. Our taxpayer was audited by the IRS and had additional taxes assessed on 15 April 2014. His 240 day mark is 11 Dec 2014, therefore, he can not attempt to discharge the taxes in bankruptcy until at least 12 Dec 2014.

The Collection Statute Expiration Date is ten years from the assessment date plus one day. This is pushed back for any days the statute is tolled.

Example: If our taxpayer were to file an OIC application the CSED is tolled for the time the application is being considered and for 30 days after a rejection of an OIC and the 240 Day Rule is also tolled. If our taxpayer filed an OIC on 15 Sept 2014, while the 240 Day Rule was still in play, and it was rejected on 15 Jan 2014, the 240 Day Rule is extended by 117 days and the CSED is extended by 152 days.

 

 

 

 

 

 

 

 

By charting out your dates for each year in question you can easily see when the earliest dates can be reached to file tax liabilities in a bankruptcy case. You may use these charts to determine which taxes you want to include in the bankruptcy, which taxes can not or should not be included and when the bankruptcy should be filed. We will discuss some of this a little further on in the course.

Monday we delve into the other items that can prevent discharge of your taxes in a bankruptcy case in Part 3.

In accordance with Circular 230 Disclosure