discharging taxes in bankruptcy

IRS From 1040Some time ago I wrote about discharging income taxes in bankruptcy.  I stated that there is a three-part test for determining their dischargeability, and started with the following executive summary:

For a tax to be dischargeable in bankruptcy, it must satisfy three requirements:

  1. (The three-year rule) The tax return for the tax year in question must have been due (including extensions) – but not necessarily actually filed – at least three years before the filing of the bankruptcy papers,
  2. (The two-year rule) The debtor must have actually filed a legitimate, nonfraudulent tax return for that tax year at least two years before the filing of the bankruptcy papers, and
  3. (The 240-day rule) The taxing authority cannot have assessed the tax during the 240 days prior to filing the bankruptcy papers.

The second requirement, the so-called two-year rule, has been the subject of extensive litigation throughout the country, with a wide range of inconsistent outcomes.  Therefore, I suspect that the Supremes will eventually be asked to consider the matter.

My focus today is on what happens if the taxing authority files something called a substitute for return on behalf of the debtor/taxpayer.  For linguistic simplicity, I will refer to the taxing authority as the IRS, though the discussion applies, mutatis mutandis, if the taxing authority is a state taxing authority such as California’s Franchise Tax Board.
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In my last post – the one about the taxation of cancellation of debt income – I promised I’d write about discharging income taxes in bankruptcy.  In fact, I recently published an article on the subject, but the flavor was a bit dry and technical.  I’ll try to make today’s version a bit less so.

By the way, although some articles on that site are ghost-written, I really did write the article.

I.          Discharging Taxes In Bankruptcy

There are two possible scenarios:  discharging taxes in a bankruptcy other than a completed Chapter 13 plan, and discharging them through a completed Chapter 13 plan. 
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