The rules below apply to both federal and California income tax returns.
If all the following 8 conditions are met, the income tax for a year is dischargeable.
1. 3+ YEARS AFTER TAX RETURN IS DUE. The bankruptcy petition is filed more than 3 years after the due date of the tax return in question. If April 15 (or any extended due date) falls on a weekend or holiday, the due date would be the following regular weekday. An extension of time to file the return extends the start date of the 3 year period say to either August 15 or October 15. 11 U.S.C.§ 507(a)(8)(A)(i)
2. 2+ YEARS AFTER ACTUAL DATE FILED. The bankruptcy petition is filed more than two years after the tax return was filed. 11 U.S.C. § 523(a)(1)(B)(ii).
3. 240+ DAYS AFTER ASSESSMENT. The bankruptcy petition is filed more than 240 days after the tax was assessed. 11 U.S.C. §507(a)(8)(A)(ii).For federal income taxes the date of filing the tax return or amended return is not the date of assessment. The assessment date is the date IRS Form 23-C is signed and entered in the taxpayer's file. The California Franchise Tax Board (FTB) considers the tax “assessed” not when the return is filed but when the tax is “posted.” Thus, in order to determine the date of assessment for FTB taxes, one must inquire as to the date of posting.
4. NO FRAUDULENT TAX RETURN To be dischargeable the taxpayer cannot file a knowingly false return.11 U.S.C. §523(a) (1)(C).
5. NO WILLFUL EVASION OF THE TAX. Tax evasion refers to illegal activities undertaken by taxpayers to escape paying taxes. 11 U.S.C. § 523(a) (1)(C)
6. THE 3 YEAR, 2 YEAR, AND 240 DAY TIME PERIODS HAVE NOT BEEN TOLLED (extended). Numerous events extend the statute of limitations for the periods above. This requirement must be researched using IRS and state transcripts.
7. NO TAX LIEN SURVIVES BANKRUPTCY. The general rule is that a lien “survives the bankruptcy because it is attached to the property not the person.
8. AUDIT ASSESSMENT PERIOD HAS LAPSED. Federal taxes can be assessed within 3 years from the date of filing. In California, the audit assessment period is 4 years. So if the assessment period has not run out additional taxes may be assessed which trigger the 240 day rule.