Can IRS debt be discharged in bankruptcy?
We all should know that working people must file income tax returns each year. However, often times people who will OWE the IRS money decide that it is best NOT to file their return, perhaps under the theory that the IRS gods will become angry if they see that taxes are owed and it is better to stay off their radar. This is not the case, and if you have been issued a W-2 or 1099 during the year the IRS – along with state and local taxing authorities – expect a tax return to be filed.
Even if the taxpayer does not have the money to pay the taxes owed, it is ordinarily better to file the tax return anyway, without payment, than to simply skip or delay the filing of the return. This is even more clear after a recent court opinion in the 3rd Circuit.
Most Americans probably believe that income taxes can never be discharged in bankruptcy. In reality, the U.S. Bankruptcy Code provides that income taxes which are more than 3 years old can potentially be eliminated in a bankruptcy proceeding. In fact, we regularly assist clients with the discharge of income taxes through bankruptcy. However, the May 5, 2017 decision of the Court of Appeals for the 3rd Circuit, in the case of Giacchi v. USA Dept. of Treasury, held that the bankruptcy debtor’s tax debts – which were more than 3 years old – could not be discharged because the debtor did not file his tax returns on time. The bottom line is that if Mr. Giacchi had simply filed his IRS returns in a timely manner he could have saved himself thousands of dollars.
Unless your tax professional or attorney advises you otherwise, plan on filing your tax returns on time, even if you cannot afford to pay the amount owed to the taxing authority. You can always establish a payment plan to pay the amounts owed, which is more pleasing to the IRS gods than an unfiled return.