Federal income taxes cannot be discharged in bankruptcy unless the tax debt meets very specific requirements. Discharge of tax debt is limited to unsecured debt. Federal tax liens may not be discharged in bankruptcy. If the tax debt is unsecured, then it must satisfy a five-part test to be discharged in Chapter 7 bankruptcy.
First, the deadline to file a return must be more than 3 years before the date of the bankruptcy filing. Keep in mind that any requests for an extension push out the deadline for filing. In determining whether three years has passed the debtor should count forward three years from when the return was actually due, so if an extension was requested then the debtor must count forward from the due date under the extension.
Second, the tax must not have been assessed by the IRS during the 240 days preceding the petition date. The term assessed refers to when the IRS actually puts the taxes on their books. Assessment usually takes place when the return is filed. However, if the IRS has begun auditing the tax debt then it may assess the taxes at that time.
Third, the debtor must have filed his tax return more than two years before the date on which the bankruptcy case is filed. This date may not be the date on the Form 1040. The debtor should review his tax transcripts to determine when the IRS believes the return was filed. If the debtor failed to file a tax return then the debt cannot be discharged in bankruptcy.
Fourth, the debtor must not have filed a fraudulent return. If the debtor prepares his own return then he may not even be aware that fraud has occurred. The debtor should review his tax transcripts to determine whether or not the IRS believes that the return may be fraudulent.
Finally, the debtor must not be guilty of tax evasion. A debtor is guilty of tax evasion when they “willfully attempt to defeat or evade the tax.” Willfully attempting to defeat or evade tax means to voluntarily, consciously, and intentionally attempt to evade the tax.