In New Jersey, navigating the rules for discharging tax debts in bankruptcy can be challenging. While bankruptcy offers a path to financial relief, the ability to eliminate federal or state tax obligations depends on strict requirements, especially for income taxes. Understanding when tax debts are dischargeable is crucial to protect your rights, so reach out to an experienced Bergen County bankruptcy lawyer today.
What Are Tax Debts in Bankruptcy?
Tax debts in the context of bankruptcy are outstanding financial obligations owed to government entities, such as the Internal Revenue Service (IRS) for federal taxes, or state and local tax authorities (like the New Jersey Division of Taxation). These debts can include income taxes, property taxes, sales taxes, business taxes, and payroll taxes.
What Does It Mean for a Debt to Be Discharged?
In the context of bankruptcy, a debt being “discharged” means the debt is eliminated and the debtor is legally relieved of the personal obligation to pay that specific debt. A discharge is a permanent order prohibiting creditors from taking any form of collection action on the discharged debt, including lawsuits, wage garnishments, or phone calls.
When a debt is discharged, it is essentially wiped clean from the debtor’s financial liability. However, it is important to understand that not all debts are dischargeable in bankruptcy, and certain liens on property may survive a discharge. For tax debts, the rules are complex and depend on the type of tax, how old the debt is, and whether returns were filed.
When Are Tax Debts Dischargeable?
Whether or not tax debts can be discharged in bankruptcy depends on a strict set of rules, often referred to as the 3-2-240 rule, which mainly apply to income taxes. For a federal or state income tax debt to potentially be discharged in a Chapter 7 bankruptcy, it generally must satisfy three tests:
- The three-year rule (filing deadline): The tax return for the debt must have been due at least three years (including extensions) before the date the bankruptcy petition is filed. For example, a 2021 tax return, generally due in April 2022, is not dischargeable if the bankruptcy is filed before April 2025.
- The two-year rule (filing date): The tax return must have been actually filed by the debtor at least two years before the bankruptcy filing date. An unfiled or late-filed return may not pass.
- The 240-day rule (assessment date): The tax must have been assessed by the IRS or New Jersey Division of Taxation at least 240 days before the bankruptcy petition is filed. This period can be tolled (paused) if an Offer in Compromise or a request for a hearing was pending.
It is important to note that certain tax debts, such as those related to unfiled returns, fraudulent returns, or trust fund recovery penalties, like unpaid payroll taxes, are never dischargeable. Tax liens will also remain attached to property even if the underlying personal liability is discharged. Property and sales taxes also have different dischargeability rules, often tied to when the tax was last due. Consult with a bankruptcy attorney for assistance in navigating these complex requirements.