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An article found on the internet...

Former IRS agent, Dexter Schuman said that even attorneys weren't familiar with the concept. They'd fight him, refusing to believe this could be done. Schuman knew it could - because when he worked for IRS collecting debt from a particularly difficult taxpayer, it had been done to his case.

Oddly enough, although today, you hear commercials about this on television all the time - especially if you're up late at night - many attorneys still don't understand the concept - or know how to do it properly. So, if you decide to file for a tax bankruptcy, please made certain your bankruptcy attorney has experience discharging taxes.

If not, keep looking until you find someone who does. I am fighting a case today where California state taxes weren't discharged by a Nevada attorney back in 1996-97. The balance today is over $80,000. You don't want that to happen to you.

Let me explain how this works, OK?


First of all, it's true, there is no such thing as a tax bankruptcy. It's just your regular, run-of-the mill Chapter 7 filing.

However, if your tax debt fits a certain profile, you are allowed to discharge it.

Here are the conditions:

  1. The tax return is for a year that is at least 3 years before you file for bankruptcy.
  2. The tax return was filed more than two years before you file the bankruptcy petition.
  3. The tax was assessed more than 240 days before you file the bankruptcy petition (this for audits, and additional assessments).
  4. The tax didn't result from a fraudulent tax return or tax evasion. *
  5. The tax was not secured against your property. In other words, no lien was filed.
  6. The didn't result from a trust fund penalty for unpaid employer's payroll taxes.

* ed. better stated:
You did not commit fraud or willful evasion. You did not file a fraudulent tax return or otherwise willfully attempt to evade paying taxes, such as using a false Social Security number on your tax return. 

Meaning, if the taxpayer willfully chose the keep their money rather than sending it to the IRS to pay the taxes legitimately due, that that is considered by the IRS to be evading the payment of the tax, and therefore, under the Bankruptcy Code, non-dischargeable.

11 U.S.C. §523 Exceptions to discharge
11 U.S.C. §523(a)(1)(C)  "with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax;"

For ten years of a twelve-year period, Anyse Storey filed federal income tax returns that showed she owed taxes - but she failed to pay them. The United States brought an action to reduce to judgment Storey's tax liabilities for the ten years, and to foreclose on its tax liens placed on real property owned by Storey. Storey argued that her Chapter 7 bankruptcy petition discharged her tax liabilities for some of the years preceding the filing. The district court disagreed and entered judgment in favor of the United States, finding that Storey had willfully attempted to evade paying taxes for those years, preventing discharge of the obligations through her bankruptcy filing. Because the United States cannot carry its burden on the issue of willfulness, we REVERSE.  U.S. v. STOREY United States Court of Appeals, Sixth Circuit. Decided and Filed: May 16, 2011.


If you talk to a bankruptcy attorney who understands about taxes and bankruptcy, you'll start hearing that phrase - tolling the statute. /font>

It means that all those time-frames above (the 3 years, the 2 years, etc.) all have time added to them if you have ever filed for an appeal on an audit; or if you have ever filed for an offer in compromise (OIC); or a Tax Court petition... among other things.

Doing these things stops the clock and the time you spent in appeals or in OIC status or span of time from filing with the Tax Court until the case is settled - all of those stretches of time are added to the three years, two years, etc.

This is one of those computations that is very tricky. So, you'd prefer to err on the side of safety. If you're not sure of dates - add several weeks extra before filing your bankruptcy.

Under no circumstances do this one alone.


Well, I didn't see anything in there that eliminates your right to discharge taxes. So, that's the good news.

The bad news is that you're going to have to meet much more stringent income and repayment standards than in the past. In fact, most people won't even qualify to file for a Chapter 7 bankruptcy if they have jobs and a stream of income.

You'll find a really good flow chart here.

So, if you're thinking that you might be a good candidate for a tax bankruptcy, do it as soon as you can. Once the new law takes effect on October 17, 2005, you may no longer qualify for Chapter 7 at all.

For more information on Tax Bankruptcies:

Eliminating Tax Debts in Bankruptcy - by Nolo Press

"For Whom the Tax Tolls: Significant Events That Extend IRS Collection Rights"

The Top 10 Things to Know about Bankruptcy

Do it yourself Bankruptcy Filing State of California


From time to time people get audited. When this happens the examination is handled here from Connecticut via telephone and fax.

Taxpayers requiring more assistance in their PLANNING, design and set-up of their trading business and with the PREPARATION or the REVIEW of their tax filings are encouraged to contact us for personally tailored tax advice at our normal rates.

How can a CPA help you? 

Why work with a CPA? 

Tax Mama's I  can do it myself, thank you! 

Smart Money's Finding a Tax Pro 

The Blade's Complicated Returns send filers to the Pros 

What's needed to get started right away?

Write to us first with an outline your situation and what you are looking to accomplish (besides the obvious: lowering tax bill)wink!

Colin M. Cody, CPA, CMA LLC
6004 Main Street
Trumbull, Connecticut 06611-2400

(203) 268-7000


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