Tax Debt: Top 5 Things to Know about Taxes and Bankruptcy

Tax Debt and Bankruptcy

It is not unusual for people find themselves in a debt situation that has gotten out of control.  And if you are struggling financially, the last thing you need is tax debt and the very real  possibility of dealing with the IRS.

In general, there are 5 things you need to know about discharging your tax debt.

  1. The “3/2/240” rule What is it and what does it mean for me?  The 3/2/240 rule applies to taxes that are on or measured by income or gross receipts.
    1. 3: Return was due at least 3 years before the petition date
    2. 2: A return or equivalent notice was filed at least 2 years before the petition date AND
    3. 240: The tax claim was assessed at least 240 days before the petition date.
  2. Fraud and tax evasion: Tax debts are not dischargeable if it is determined that the debtor made a fraudulent return.  An example of a fraudulent tax return is when an individual underreports a tax return in order to avoid paying taxes.  Fraud and tax evasion go hand in hand.  Tax evasion occurs when an individual fails to file a tax return, pays employees in cash, or fails to pay payroll taxes.
  3. Assessable but not assessed: Income taxes that were not assessed before the petition date, but were assessable as of the petition date, are not dischargeable.  This means that even though you have filed for bankruptcy you must still pay any taxes which occur during the time of your filing.  Filing bankruptcy is not a reason to stop paying your taxes.
  4. Property taxes: Property taxes incurred before the commencement of the case and due at least one year before the petition date are dischargeable
  5. Payroll taxes: A tax required to be collected or withheld and for which the debtor is liable in any capacity is nondischargeable.  Payroll taxes are not only nondischargeable for the debtor, but also for the individual paying the payroll taxes.  If you are working for a business that is having financial troubles, and you are responsible for paying the payroll taxes you need to remember:  the IRS holds YOU responsible for any and all unpaid payroll taxes.

Taxes and bankruptcy can be very complicated.  You need to know this:  as a business, ALWAYS, ALWAYS, ALWAYS pay your payroll taxes.  As an individual, ALWAYS, ALWAYS, ALWAYS file your tax return in a timely manner.  Filing within the period allowed by any authorized extension is still “timely.” You can’t discharge your tax debt if you don’t file a timely return.

At the Law Office of George “Dave” Giddens, P.C. our attorneys serve Albuquerque, Santa Fe, Taos, Raton, Farmington, Gallup, Grants, Roswell, Los Lunas, Placitas, Belen and the rest of New Mexico. We have bankruptcy attorneys who offer expert handling of Chapter 7,Chapter 11, Chapter 12 and Chapter 13 bankruptcy cases in New Mexico. The firm represents many debtors and creditors in Albuquerque, Santa Fe, Taos, Raton, Farmington, Gallup, Grants, Roswell, Los Lunas, Placitas, Belen and the rest of New Mexico. Our conveniently located office has ample free parking and is easily accessible by public transportation. We offer flexible office hours upon request. To make an appointment for a consultation about your matter, contact us online by visiting the firm’s website at or call us at (505) 271-1053. Giddens & Gatton Law,amp; P.C. is located at 10400 Academy Road N.E., Suite 350 in Albuquerque, New Mexico