Bankruptcy and Tax Debt

Did you know that if you are involved with some debt to the IRS that you might be able to get out from under that debt using either Chapter 7 or Chapter 13? There are five ways to get out of tax debt and bankruptcy is one of them. You must first make sure that you meet the requirements that will discharge your tax debt. Chapter 7 allows for a full discharge of allowable debts. Chapter 13 provides a payment plan to repay some debts, with the rest of debts discharged. Under the new bankruptcy laws that were introduced in 2005, tax debts are treated the same way in both Chapter 7 and Chapter 13 petitions.

All tax debt does not qualify for discharge in bankruptcy; you have to meet specific criteria for discharge to be considered. Tax debts are associated with a particular tax return and tax year. The bankruptcy law lays out specific criteria for how old a tax debt should be. If the income tax debt meets all of the set forth criteria then it can be discharged in Chapter 7 and Chapter 13 bankruptcy petitions. There are five criteria specifically, the due date for filing a tax return was a minimum of three years ago, the tax return was filed at least two years ago, the tax assessment is at least 240 days old, the return was not fraudulent, and you are not guilty of tax evasion.

The bottom line is that if you owe the IRS money then you are pretty limited on your options. You can set up a monthly payment plan, set up a fairly new debt management program where you have a long term payment plan to pay off the IRS at a reduced dollar amount, a program where you can settle your tax debts for less than what you owe but you will have to pay a lump sum down, a program where the IRS voluntarily agrees not to collect on the tax debt for a year or so, or discharge your tax debts under the strict rules of a Chapter 7 or 13 bankruptcy petition. These are the only five ways of getting out from under the IRS' aggressive debt collection tactics.

If you have tax debts that are a result of unfiled tax returns, they do not qualify. These tax liabilities cannot be discharged unless the taxpayer files a tax return for the year in question. Before a Chapter 7 or Chapter 13 bankruptcy can be granted, you are required to prove that the four previous tax returns have been filed with the IRS. The four previous tax returns must be filed no later than the date of the first creditors' meeting in a bankruptcy case. Additionally, you are required to provide a copy of your most recent tax return to the bankruptcy court. Creditors can also request a copy of the tax return, and you must provide a copy to them.

Have you fallen victim to bankruptcy? Contact a Bankruptcy Attorney today!