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How Bankruptcy Can Ditch IRS Tax: 3-Year Rule & Key Dates to Know
Postponed Tax Filing Due Dates Impact Bankruptcy and the Three-Year Rule
Taxes in bankruptcy don’t normally go away or get discharged. However, there are some exceptions to the rule. Sometimes, older tax debts can be discharged in bankruptcy. One of the keys is the due date of the taxes, which is not always April 15. Events can move the tax due date. These extensions impact the 3-year rule.
One of the factors to determine bankruptcy dischargeability of tax debt is what we call the “three-year rule” per 11 USC 507. Note: there are factors that can stop (or toll) the three-year clock, so three years is not set in stone. See a bankruptcy professional or tax expert for analysis of your unique situation.
The Three-Year Rule of Section 507
Let’s start with the general rule. Section 507 of the Bankruptcy Code says, in part, at (8)(A)(i):
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 for a taxable year ending on or before the date of the filing of the petition—
(i) for which a return, if required, is last due, including extensions, after three years before the date of the filing of the petition;
Taxes are due on Tax Day: April 15 each year, so this is easy, right? Not so fast. Notice the wording of that, when “last due.” If the taxpayer, for example, got an extension to file their tax return in a given year, the due date is no longer mid-April, but the extension date. So, it would be the extension’s due date from which the three years started.
We’ll often count three years from the due date for the taxes of a given year, typically around April 15. However, this date can be moved by the taxpayer if the taxpayer got an extension to file.
Plus, there are other factors which can move the tax due date: government action.
Exceptions to the Rule: Governmental Extensions
We saw that the taxpayer can ask for an extension to file their return, which changes the date that the taxes were “last due.” In addition, a government taxing agency can also move the date.
This is often done to accommodate a region (or the entire nation) affected by a natural disaster, or even just a weekend or the day of the week. It can be extended by the federal government (IRS), the state tax authority, or both.
Note: the following is not intended or meant to be an exhaustive list of every due date extension for all years, but only to highlight a couple which are relevant now in 2023.
Due Date for Tax Year 2019
So, yes, the tax filing due date can also be moved by the government. We saw this during the Covid-19 pandemic. The tax due date deadline to file federal and state 2019 returns was extended to July 15, 2020 due to the pandemic.
As a result, filing bankruptcy on April 16, 2023 this year would likely have no effect on tax debt from tax year 2019. Why? It hasn’t been three years yet since the return, (absent extension or tolling events), was last due. At the very soonest, a bankruptcy would need to be filed on or after July 16, 2023 to qualify for the 3-year rule for tax year 2019. But again, there are other considerations to weigh that would make this date later, so ask your tax professional.
Due Date for Tax Year 2022
Locally here in California, there is another change in the tax due date. This time it affects taxes to be filed this year: tax year 2022. It hasn’t gotten much publicity, but the tax due date for Californians (state and possibly federal returns) this year’s 2022 returns is May 15, 2023 because of rain storms.
That means that in 2026, filing a bankruptcy in mid-April of that year won’t discharge tax liability for tax year 2022. At the very soonest, the bankruptcy would need to be filed after May 15, 2026, possibly later depending on other factors which push the date back even further. See your tax expert for details.