Tax Traps 1095 Days Out

bankruptcy tax trap

When it comes time to discharge 2019 taxes in bankruptcy, the IRS has laid a trap.

The trap snaps shut three years (or 1095 days) from now. At that point, the familiar three year rule for tax dischargeability won’t be so simple.

Between Covid, wildfires, and hurricanes, the IRS has unilaterally extended tax filing deadlines. Instead of tax returns becoming due in April, the deadline for everyone was extended for everyone til July.

Where I live, the October due-date-with-extension was moved out to December because of wildfires. Other localities got extensions by reason of hurricanes.

Three years from now, when those taxes are on the brink of dischargeability, you need to know with certainty, when were 2019 tax returns “last due without penalty” for your debtor.

Tax discharge rules

We all know the three rules for tax dischargeability in bankruptcy:

  • the 3 year rule
  • the 2 year rule
  • the 240 day rule

Remember: it’s the due date, not any earlier date on which the return was actually filed.

We also know that tax returns are due on April 15th….or April 16th or sometimes even April 17th.

And we know that an extension to file the return moves those dates to October 15th, (or October 16 if the 15th is a Sunday).

Rules have changed for 2019 returns

So, what has happened in 2020 is that the point from which we start counting three years has changed and the start date is not uniform across the country.

The gating question for a prospective debtor has to be:

Where were you living in 2020, when these extensions of tax filing dates for 2019 returns were enacted?

Whatever you know about the rules where you practice may not apply to a client who has moved there from another locality.

And the move at issue may be no more than a move from county to county within the state. For instance, the wildfire extension here in California only applied to named counties.

The IRS provides state by state info on filing date changes online. Don’t forget that the state rules may be different still.

Whatever your calendaring tool of choice, make a note, or notes, for 2023, that to discharge 2019 taxes, the three years rule is different.


The basic 3 year rule for dischargeability

Dealing with taxes in the means test