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Tax Debt and Bankruptcy Blog

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By Michael S. Anderson of Anderson Tax Law logo for Arizona tax attorney Michael S. Anderson P.C.
  • Filed an IRS extension request before filing your tax return? This may negatively impact the discharge in bankruptcy

    Filed an IRS Extension Request before filing your tax return.  Take this into account when deciding whether to use bankruptcy to discharge the debt

    Several rules exist that govern whether an  income tax debt is dischargeable in a bankruptcy case.  They are all important, but the first one typically mentioned is often given the least amount of thought.  That is the “three year1040 rule”.

    The bankruptcy code, specifically section 523, disallows the discharge of income tax based on a tax return that was due to be filed less than 3 years before the  filing of the bk case.

    If, for example,  the case was filed on Oct 14, 2011, and the tax debt was from the year 2007,  the 2007 tax return should have been filed or was due to be filed April 15, 2008.  This would satisfy the 3 year rule.

    But…what is often missed is when the return was actually due to be filed.

    As stated above, the 2007 tax return would have been due to be filed on April 15th 2008.  This would be more than three years prior to the filing date of the bankruptcy and the debt would meet the first requirement in obtaining a discharge of the debt.

    BUT…what if the taxpayer filed an extension to file the tax return on April 14th, 2008.  The due date for that return would have been moved to October 15, of that same year.  Given the above filing date of the bankruptcy of October 14, 2011, the bankruptcy would have been filed a  day too soon to meet the 3 year rule and the debt wouldn’t be discharged in the bankruptcy.

    This extended time period adds an equal amount of time to the calculation of the three year rule for purposes of discharging the income tax debt.  Taxpayers with serious tax debt and their counselors need to be aware of this glitch in the law.  I have been contacted often by many filers after the fact,  who didn’t understand why their tax debt wasn’t wiped away.  Often, it is because they filed three years after the April 15th due date and not three years after the extension date.