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Can Federal 1040 Income Taxes be Discharged in a Chapter 7 Bankruptcy in Michigan?

Michigan Bankruptcy and 1040 Income Taxes.

Yes, provided the 5 following rules are met:

1.  The taxes at issued must be 1040 Income Taxes. Taxes such as payroll taxes, trust fund taxes, sales tax or fraud taxes are treated differently.

2.  The 3 Year Rule. The income tax return for which the taxes are owed must have been due at least 3 years before you file for bankruptcy – including any extensions. Generally, the due date is April 15 of the year the return is due. If an extension is filed, then the due date is extended to August 15 or October 15 of that year. For example, if a tax was due from a 2008 income tax return, the due date of that tax liability would be April 15, 2009. You would have to wait until April 15, 2012 to file the bankruptcy to discharge the taxes.

3. The 2 Year Rule. If you file a late return, you would have to wait at least 2 years to discharge the tax from the date you filed that late return. The time is measured from the date the taxpayer actually filed the return. So, even if the debt is over three years old, if you file late you would have to wait at least 2 years from the date you filed your late return.

4.  The 240 Day Audit Rule. If you are audited and additional taxes are assessed, you must wait 240 days (8 months) before you can file a bankruptcy petition to discharge that additional tax – even if you otherwise qualify under the 3 year rule and the 2 year rule. Any IRS assessment can arise from a self-reported balance due, an IRS final determination in an audit, or an IRS proposed assessment which has become final. Moreover, the IRS can extend this time period due to suspended collection activity if an to compromise the debt has been presented or because of a previous bankruptcy filing.

5. The Fraud/Willful Evasion Rule. Finally, there is no discharge provision if you filed a false or fraudulent tax return or willfully attempted to evade paying taxes.