I had a nice couple come in recently, that had not filed their tax returns for three years. The husband had to take out a 401(k) to make ends meet, and they knew that they would owe a lot of taxes. They already owed a significant amount, when their small business failed to the husband's illness and subsequent disability.

After going through the other options with them, bankruptcy became a likely alternative (they owed a lot of other debt also). But because the tax returns for the three recent tax years were not filed, they will likely decide to wait to file Chapter 7 bankruptcy. For IRS income taxes to be discharged or cancelled in bankruptcy, the tax returns must be filed more than two years before the filing of the bankruptcy case, among other requirements.

Other requirements: The taxes must also be three years old, measured from the "due date" of the tax returns. And the taxes cannot have been "assessed" or determined to be due by the IRS, within the 240 days (about 8 months) prior to the filing of the bankruptcy. In the Bankruptcy Code that existed prior to Oct. 17, 2005, there was what I call the "bad-boy" provision in Chapter 13 of the Bankruptcy Code, where a person who had not filed their tax return could file a Chapter 13 bankruptcy, and discharge taxes even if they had not filed a tax return, so long as the taxes were more than 3 years old.

But that was done away with by BAPCPA, the "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005." Now, the rules are the same in Chapter 7 and Chapter 13, and require that a taxpayer has filed their returns at least 2 years before filing the bankruptcy, in order to have the taxes discharged. What to do in the meantime? Ask for an Installment Agreement, where you make payments on the tax.

Or, if you qualify, you may be eligible for "uncollectible status," where the I.R.S. basically puts your file on a shelf temporarily. In either case, the time limits continue to run, and you can file the bankruptcy after they have passed. If you live in the Houston Texas area or surrounding counties, give my office a call at 713-772-8037 to make an appointment.

J Thomas Black
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Board Certified, Consumer Bankruptcy Law- Texas Board of Legal Specialization
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