Tax Debt Tolling

February 5, 2015

Despite common myths, personal taxes are dischargeable in bankruptcy, but only if the following conditions are satisfied:

  • The taxes are income taxes;
  • There is no evidence of fraud or willful evasion;
  • The debt was originally due at least three years before the bankruptcy filing (Three Year Rule);
  • A tax return for the debt was filed at least two years before bankruptcy (Two Year Rule); and
  • The tax debt was assessed by the IRS at least 240 days before the bankruptcy was filed (240 Day Rule).

Unfortunately, the rules surrounding discharging taxes can get confusing, especially when attempting to accurately calculate the time restrictions mentioned above. Confusion often occurs when one of these time period is “tolled.” There are several situations which will temporarily stop the clock on these time periods, including:

A prior bankruptcy case. The filing of a bankruptcy case will toll both the Three Year Rule and the 240 Day Rule.

A request for a due process hearing or an appeal of a collection action taken against a debtor. These actions also toll both the Three Year Rule and the 240 Day Rule.

An offer in compromise. An offer in compromise offers to settle a tax debt for less than the full amount due. The submission of an offer in compromise will toll the 240 Day Rule. If the taxpayer makes an offer in compromise within 240 days of filing for bankruptcy, the 240 day time rule will be suspended for the time during which the offer in compromise is pending, plus an additional 30 days.

Tax litigation. Litigation in Tax Court will toll both the Three Year Rule and the 240 Day Rule.

A request for an extension of time to file a tax return. Filing for an extension will: (a) delay the start of the Three Year Rule to the extended due date; (b) delay the start of the Two Year Rule until the actual filing date; and (c) delay the start of the 240 Day Rule until the tax is actually assessed.

 

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