In some limited cases, delinquent taxes can be discharged through bankruptcy. However, there are very specific and complex rules in regard to bankruptcy and the IRS. Discharging delinquent tax debt through bankruptcy can be done but the following criteria must be met:
- Tax returns were filed more than two years prior to the bankruptcy filing
- The tax liability was assessed more than 240 days prior to the filing of the bankruptcy petition
- The liability is not due on Trust Fund Tax
- The taxpayer did not attempt to evade or defeat the tax, nor was the tax liability due to a fraudulent tax return
- The tax was not assessable at the time of the filing of the bankruptcy petition
- The tax was unsecured
- It has been more than 3 years since the returns were last due to be filed (including extensions)
- The returns were timely filed, or it has been at least 2 years since the returns were filed
What are the Types of Bankruptcy?
There are two basic types of bankruptcy available: Chapter 7 and Chapter 13. Chapter 7 of the Bankruptcy Code concerns the discharge of debts and is considered the more traditional form. Under this code, you either pay for or give up property to settle debts. To qualify for Chapter 7, you must prove that you do not have sufficient income to pay a portion of your debts.
Chapter 13 bankruptcy means that you do have enough income to pay a portion of your debts but not enough to pay it off entirely. This means that you are seeking to restructure your repayments to make them more manageable. Chapter 13 bankruptcy involves adhering to a payment plan that can last up to five years and the tax under this code cannot be discharged.
Is Chapter 7 or 13 better?
Under most circumstances, chapter 7 is better because it is faster, and you can avoid paying creditors through a 3–5-year repayment plan that is a part of Chapter 13. However, it will depend on your personal financial situation as to which one may be better suited to you. Once again, under Chapter 13, tax cannot be discharged.
What Tax Debts cannot be discharged?
Most non-income-related tax debts cannot be discharged in Chapter 7 bankruptcies. These include:
- Tax liens
- Recent property taxes
- Certain employment taxes
- “Trust Fund” taxes such as FICA, Medicare, and income taxes that an employer must withhold from the pay of an employee
- Erroneous tax refunds or credits associated with non-dischargeable taxes
There is a solution to every IRS problem! Let us help you stop worrying and start living!
Contact Us Today
If you need an expert tax resolution provider who knows how to navigate the IRS maze, call us today at 1.888.4TAXREZ or use our contact form, and we’ll schedule a no-obligation confidential consultation to explain your options to permanently resolve your tax problem.