Can Federal or State taxes be discharged in bankruptcy?
Answer: It depends.
Back taxes can be discharged (you do not have to pay them back) if:
- From the date you filed bankruptcy, 3 years have elapsed from the date the taxes were due to be filed.
- From the date you filed bankruptcy, at least 2 years have elapse from the date you filed your tax return. (This provision has been voided by what is known as McCoy rule. Any tax return filed a day late, is not considered a tax return).
- From the date you filed bankruptcy, at least no 240 dates have elapse from date IRS assessed your tax return.
- No fraud or willful evasion on your part.
The problem arises with “part two” of the test.
The courts used to look at this section, they would look at date taxes were filed, and if two years have elapsed, and you filed bankruptcy (and other parts of the test were satisfied), your taxes were discharge.
Then one judge interpreted the statutes differently (what now is referred to as McCoy rule), he believed if you filed 1 day past the date the taxes were due (it was not a valid tax return), the taxes were not discharged, no discussion.
California has recently taken a different view. To be deemed a valid return the late filing be an honest and reasonable attempt to comply with the tax code. In other words, the court will review the facts as to why you filed a late return. If you filed 2 years late because you were busy partying, you were out of luck. However, if you had a medical condition, or were in a coma, the court would probably grant the discharge of taxes in California.
Marvin Mann
Law Offices of Marvin Mann
