3-Year Due Date Rule

Taxpayers are denied a discharge of tax owed relating to a tax return with a due date of less than three (3) years before the bankruptcy case was filed.

All income tax debt is discharged by a general discharge order entered pursuant to Section 727 (Chapter 7) or Section 1328 (Chapter 13), except those types of debt specifically excepted from discharge. Section 523 contains the exceptions to discharge. Section 523(a)(1)(A) excepts from discharge any debt for a tax of the kind specified in Section 507(a)(8). This cross-reference to Section 507(a)(8) excepts from discharge the unsecured priority claims of government units.

So, priority tax claims are not discharged. But, what is a priority tax claim? A tax claim is granted priority status if the taxpayer violates either (1) the “3-year priority look-back period” or (2) the “240-day assessment period.” The 3-year priority look-back period is discussed below. The 240-day assessment period is described elsewhere on this website.

The 3-year priority look-back period: Section 507(a)(8)(A)(i) designates a tax claim as a “priority” tax claim for unpaid income taxes “for which a return, if required, is last due, including extensions, after three years before the date of the filing of the petition.” This provision is commonly called the “3-year priority look-back period.” The Collier Bankruptcy Manual states that the “due date for the tax return, including any extension periods, is the starting point and the date of the filing of the bankruptcy petition is the end point for application” of the 3-year priority look-back period. Again, the “due date” is the key issue, not the date the return was actually filed.

The tax return “due date” is the date on or before which the tax return is required to be filed.  For IRS taxes, the filing due date is April 15th following the prior tax year, assuming that date is not a weekend or holiday. However, the “due date” for bankruptcy purposes changes when a taxpayer requests and receives an automatic extension of the filing due date.  For example, a taxpayer can file IRS Form 4868 “Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.”  This application extends the due date 6 months to October 15th.  In such a situation the “due date” for bankruptcy purposes would be October 15th — even if the taxpayer files the return between the April 15th original deadline and the October 15th extended deadline.  The date of filing is not at issue; the “due date” is the key issue for 11 U.S.C. §507(a)(8)(A)(i) purposes.

Similarly, the “due date” for state and local taxes could also be extended automatically even without the taxpayer submitting a request to the state and local taxing authorities.   Some states automatically extend the due date for the state tax returns if a taxpayer requests and receives an extension of the federal tax return due date.  Under these circumstances, the “due date” for bankruptcy purposes for those state and local taxing authorities would be the extended due date.

The last sentence of the hanging paragraph of Section 507(a)(8) provides that the priority look-back time period is statutorily tolled during the pendency of any type of legally mandated collection stay under bankruptcy or nonbankruptcy law. The tolling time period has also been expanded by 90 days in addition to the number of days that collection was stayed.

Read our blog for some interesting legal cases involving taxpayers attempts to discharge income tax debt by filing bankruptcy.

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