Depending on the circumstances, bankruptcy offers direct or indirect solutions to tax debt.
If you are struggling with debt, you are likely behind on many of your bills. Unfortunately, this also means that you cannot pay your tax debts in many cases. To help them with their tax problem, many people have considered bankruptcy, but have heard that it cannot help them with past due taxes. Although this is sometimes true, bankruptcy can help the majority of those struggling with tax debt, even if only indirectly.
How bankruptcy treats tax debt
Tax debt is sometimes dischargeable in bankruptcy if it meets certain criteria. Whether the tax debt is dischargeable depends on how old the tax debt is and other factors. Under the bankruptcy code, tax debt must meet the following criteria to be discharged:
• The taxes must have been overdue at least three years before filing bankruptcy. If the IRS granted you any extensions, three years must have passed since the extended due date.
• The tax return must have been filed a minimum of two years before the bankruptcy was filed.
• The tax to be discharged must have been assessed by the IRS at least 240 days prior to the date the bankruptcy was filed.
• The tax return must not have contained any intentional attempt on your part to defeat or evade taxes.
• The tax return must not have been fraudulent.
Tax returns that meet the above criteria may be discharged in bankruptcy. Once the court has granted the discharge, you no longer have to pay the tax debt covered by the discharge, including any interest or late payment penalties assessed by the IRS.
If your tax debt is not dischargeable, bankruptcy can offer an indirect solution. If you file for Chapter 7, most of the other debt that you are likely struggling with (e.g. credit cards, medical bills) is discharged. Once free of this debt, you can devote more of your income towards paying your tax debt.
Additionally, filing Chapter 13 bankruptcy can help your situation. If you file this type of bankruptcy, the undischargeable tax debt is put into a repayment plan and is repaid over a three to five year period. Additionally, most of your other debts are discharged during the Chapter 13 process, allowing you to more easily pay off your tax debt during this repayment period.
In addition to bankruptcy, there are other means of addressing your tax debt. In some cases, a payment plan can be worked out with the IRS. In other cases, overdue tax debt can be settled for less than the full amount by negotiating an offer in compromise.
If you are struggling with overdue taxes, it is wise to seek the advice of an experienced bankruptcy attorney. An attorney can review your options with you and recommend one that would best address your situation.
Keywords: bankruptcy, tax debt
