If you’re behind on your tax payments to the IRS, it can seem like there’s no way you’ll get out of this situation unless you liquidate your entire estate. Before you do that, however, know that it may be possible to discharge some tax debt during bankruptcy.
Requirements for Discharging Tax Debt
If you are seeking relief from tax debt, the best way to get it is through Chapter 7 bankruptcy. Keep in mind that you must first be eligible for Chapter 7 to file for it, and the tax debt you’re hoping to eject must also be dischargeable through Chapter 7.
Let’s take a look at some specific requirements.
Your Tax Debt Is from Federal Income Taxes
Not all tax debt is dischargeable, but federal income taxes can be. If your tax debt consists of payroll taxes or penalties as a result of fraud, it can never be cleared through bankruptcy.
Your Tax Debt Isn’t a Result of Fraud or Willful Evasion
Like most other debts, tax debts can’t be ejected under any circumstances if they were incurred as a result of fraud or willful evasion. If you filed a fraudulent tax return or intentionally avoided your tax liability – such as by underreporting your income – bankruptcy will not work.
You’ve Filed a Recent Tax Return on Time
Those who wish to qualify for tax debt discharge in bankruptcy must have filed a tax return for the debt at least two years to the date prior to filing for bankruptcy. If you’ve filed a late tax return, it may not always be possible to wipe your debt.
You Meet the ‘240-Day’ Requirement
The tax debt you wish to discharge in bankruptcy must also have been assessed by the IRS at least 240 days prior to your filing or not at all. This means that if your tax debt was assessed any time sooner than approximately eight months before declaring bankruptcy, it may not be dischargeable.
Tax Debt & Chapter 13 Bankruptcy
Chapter 13 bankruptcy can help those behind on their taxes deal with debt to the federal government by creating a repayment plan. As long as a tax return is filed, some dischargeable taxes (those older than three tax years) can be forgiven whether or not any payment was provided toward such debt. Additionally, any dischargeable taxes won’t incur penalties or interest.
Any tax liens against your property can’t be wiped out through bankruptcy, but Chapter 13 can provide a plan that makes it easier to pay the lien. The IRS is obligated to comply with your tax repayment plan in Chapter 13, which stops collection actions as long as you adhere to your requirements in the plan.
If I Have Tax Debt, When Should I File for Bankruptcy?
There’s no advantage to gain by waiting to file a federal income tax return after filing for bankruptcy. Still, it’s wise to remain current on your tax filings for other reasons.
If you file for Chapter 7, providing the bankruptcy trustee with your most recent tax return can help you fight for necessary exemptions, such as living expenses or an upcoming tax refund.
If you file for Chapter 13, you must be current on your tax returns. That said, you can file a motion to gain some time to provide your returns. You can wait for the IRS to file an estimate of your tax liability based upon your income, but this is almost guaranteed to be higher than what you would actually owe.