A prospective client recently came in to the office to see me about an IRS problem. He owed over $400,000 in income taxes from several years ago, and hoped to discharge them in bankruptcy, to get a fresh start.

At first he seemed to meet all the requirements to discharge or cancel the income taxes in bankruptcy: (1) the taxes were more than 3 years old, measured from the "due date" of the tax; (2) he had filed the tax returns more than 2 years before he would be filing a bankruptcy; (3) the taxes were not "assessed" or determined to be due by the IRS, within the past 240 days; (4) he had not "willfully attempted to evade or defeat the tax"; and (5) he had not filed false or fraudulent returns.

But unfortunately, the IRS had assessed the taxes against him before he finally got around to filing his tax returns. Since the IRS had filed "substitute for returns" first, the taxes cannot be discharged in bankruptcy, either Chapter 7 or Chapter 13. The only exception to that is if the returns that he filed showed that he owed MORE than the IRS determined that he owed (by way of the "substitute for returns"), then that ADDITIONAL amount can be discharged, if he were to wait 2 years after he had filed them, and then filed bankruptcy.

If you have this situation, owing a large amount of money to the I.R.S., see me or another experienced professional to help you decide what to do. It is a very complicated area. In some cases, you may want to file bankruptcy, or perhaps file an offer in compromise, an installment agreement, or just try to "wait out" the tax, if you are in "currently not collectible" status (the IRS is not currently bothering you). See an expert to determine your best course of action.


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