What is the 2-3-240 Rule in Bankruptcy?
This rule determines the dischargeability of back taxes in a bankruptcy matter. Back taxes are priority unsecured debts which are only dischargeable in limited situations. Student loans and most FSOs (family support obligations, such as child support) are also priority unsecured debts. “Discharge” means the judge eliminates the legal requirement to pay the debt. The debt itself, which in this case is the back taxes, remains. However, the IRS or other taxing authority loses the right to collect it. So, if the IRS filed a tax lien or took other such action before the debtor filed bankruptcy, a lawyer must deal with that lien in a separate proceeding.
Usually, even if the tax debt doesn’t meet the 2-3-240 rule, a Chicago bankruptcy lawyer can at least obtain a partial discharge. When a lawyer files a motion to discharge tax debt, the judge usually sends the matter to mediation. During mediation, both sides have a duty to negotiate in good faith. In other words, they must compromise to reach an agreement and avoid a trial on the matter. If the IRS refuses to give in, the judge will be unhappy. We know from experience that an unhappy bankruptcy judge is not fun to face.
Two Years
Past due income taxes are only dischargeable if taxpayer-submitted returns have been on file with the IRS or other taxing authority for at least two years.
Precision counts. Usually, a Chicago bankruptcy lawyer must review a tax transcript to determine if the debtor meets the two-year rule. The account transcript contains what the IRS says is the date of filing of the return (if it was filed late). You cannot go by the tax return signature date or the date the debtor mailed the taxes or filed electronically. The IRS transcript will have the exact date.
Additionally, Tax Day is not always April 15. Many years, it’s two or three days later. Moreover, an executive order could extend the filing deadline for all members of a certain class, such as people who lived in a disaster area.
Three Years
Furthermore, the debt itself must be at least three years old. The three-year rule is a reference to a waiting period that must be passed if the income tax debt in question is to be considered for discharge. In order for the tax debt in question to be discharged, it must be over three years old. The three-year rule is applied to each tax year for which a debtor owes taxes. They must be analyzed individually.
If the debtor applied for any extensions, then the date due for the extension becomes the operative date. For instance, the often used 3-month automatic extension would take the tax return due date to October 15, 2018. That date becomes the operative date for counting forward three years in the dischargeability analysis. This is true even if the debtor files the tax return some time before October 15, 2018, because the statute clearly says that the date is the date the return was “last due” and not the date it was filed. The extension date becomes the starting point for counting forward. The due date of the return is controlling and not the actual filing date.
240 Days
Pursuant to this rule, if the taxes were assessed by the IRS (usually as the result of an audit) on the debtor, the assessment must be two-hundred and forty days prior to the date of the filing of the bankruptcy petition to qualify for a discharge. Once again, the tax transcript includes assessment dates, if any.
Contact a Thorough Cook County Lawyer
No matter what kind of financial problem you are having, there’s a way out. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. We routinely handle matters throughout the Prairie State.
Source:
orb.uscourts.gov/faq/how-do-i-know-if-debt-secured-unsecured-priority-or-administrative
