In some instances, personal income tax liabilities may be wiped out by filing Chapter 7 bankruptcy. Bankruptcy code section 11 U.S.C. 507 (a)(8)(A) deals with eliminating income taxes. It reads as follows:

(8) Eighth, allowed unsecured claims of governmental units, only to the extent; that such claims are for –

(A) a tax on or measured by income or gross receipts –

(i) for a taxable year ending on or before the date of the filing of the petition for which a return, if required, is last due, including extensions, after three years before the date of the filing of the petition;

(ii) assessed within 240 days, plus any time plus 30 days during which an offer in compromise with respect to such tax that was made within 240 days after such assessment was pending, before the date of the filing of the petition; or

(iii) other than a tax of a kind specified in section 523(a)(1)(B) or 523(a)(1)(C) of this title, not assessed before, but assessable, under applicable law or by agreement, after, the commencement of the case.

What does this legal mumbo jumbo mean? It means that if you filed your income tax returns on time, your income taxes are at least three years old, and the IRS or state taxing authority did not make a new assessment of income tax liability in the 240 days after the date you filed your Chapter 7 bankruptcy case, you can say goodbye to your income tax debt.

In Maali v. United States, 20 CBN 1007 (Bankr. 1st Cir.2010), Maali was not allowed to discharge 2002 and 2003 income tax debt in his Chapter 7 bankruptcy case. What went wrong? The IRS assessed additional taxes and interest, and reversed an earned income tax credit within 240 days of Maali filing for Chapter 7 bankruptcy.

So what’s the lesson if you would like to discharge income tax debt in bankruptcy? Consult an experienced bankruptcy attorney who knows the rules. And make sure to bring all of the correspondence you received from the IRS or your state taxing authority to your bankruptcy attorney. If you don’t have the paperwork, call your taxing authority and get it. Otherwise, your bankruptcy lawyer will be filing your case with inaccurate information and you might not be able to get the bankruptcy debt relief you hoped for.

© 2010 Law Offices of Roger Ghai, P.C. We are a debt relief agency. We help people file for bankruptcy under the bankruptcy code.