Bankruptcy’s 3 Year Rule for Taxes

Taxes are dischargeable in bankruptcy once they meet the 3 year rule.  Don’t get swept away on April 16th and file a bankruptcy designed to discharge taxes without knowing whether the client got an extension to file for the year on the bubble.

The three year rule, found in §507(a)(8), starts counting from the day the return was last due without penalty.  If the client got an extension, the return was last due on the last day of the extension.

So, looking at tax year 2006, if there was no extension, you start counting on April 16, 2007, when the return was normally due. If the client got the maximum extension, you don’t start counting until Oct. 15, 2007.

It doesn’t matter if the return was actually filed prior to the expiration of the extension.  For the purposes of bankruptcy, you count from the last day of the extension.

And I repeat, don’t take your client’s word for whether they got an extension, if there is more than $1.50 in question.  Get a tax transcript so you are working from the same information the IRS has.