Bankruptcy and Taxes

Bankruptcy and Taxes in Colorado

In certain circumstances, debts owed for income taxes can be discharged through either a chapter 7 or chapter 13 bankruptcy.

Chapter 7 allows for complete discharge of certain unsecured debts whereas Chapter 13 allows for the repayment of debt through a monthly payment plan, with a discharge of certain debts.

As per the Bankruptcy Code, debts for taxes can be discharged in both a Chapter 7 and Chapter 13. Some debts for taxes cannot be discharged by bankruptcy. To discharge income taxes, a debtor who owes a tax debt to the IRS or Colorado Department of Revenue needs to meet the following five criteria:

When can Tax Debts be Discharged?

If the debt for taxes meets the following requirements, the debt for taxes can be discharged in both chapter 7 and Chapter 13 matter:

1. The tax debt is for an income (Form 1040) tax liability, and not for payroll or self-employment taxes.
2. The deadline for filing the tax return was more than three years prior to the filing.
3. Two years or more have elapsed since the filing of the tax return.
4. 240 days or more have elapsed since an assessment.
5. The taxpayer did not file a fraudulent return.
6. The taxpayer has no conviction for tax evasion.

Deadline for Filing the Tax Return is More Than Three Years Prior

The debt for taxes must concern a state or federal tax return which was due three years or more prior to the bankruptcy filing date, including extensions.

Over Two Years Have Elapsed Since the Filing of the Tax Return

The debt for taxes must concern a state or federal tax return filed over two years prior to when the taxpayer’s bankruptcy filing. This time commences as of the date the debtor filed the tax return.

Over 240 Days Have Elapsed Since an Assessment

The income tax must be assessed 240 days or more prior to the debtor’s filing. The tax assessment can result from a taxpayer’s income tax balance due, a final determination resulting from an audit, or a proposed tax assessment made final.

The Taxpayer Did Not File a Fraudulent Return

A fraudulent tax return files disqualifies the debtor from a discharge.

No Conviction for Tax Evasion

A taxpayer is not eligible for a discharge any debt for taxes if guilty of a knowing or intentional act of tax evasion.

The Taxpayer has not Been Convicted of the Crime of Tax Evasion

A debtor cannot discharge a debt from taxes if the tax return (for the tax year in question) is unfiled. On tax returns which have not been filed, the IRS and Colorado Department of Revenue regularly assesses tax (and interest and penalties). The tax debt will not be discharged if the tax return has not been filed for that year at issue.

Additional Issues

Prior to the granting of a discharge in Chapter 7 or Chapter 13, the debtor needs to have filed tax returns for the previous four years with the IRS and Colorado Department of Revenue. Such tax returns need to be filed on or before the 341 Meeting of Creditors. Additionally, debtors need to provide to the trustee a copy of most recently filed state and federal tax returns. A debtor must also provide a copy to creditors of the tax return, upon request.