Tax debts can be some of the hardest debts to get rid of. Bankruptcy may be an option for certain types of tax debts. Don’t get your hopes up, getting rid of tax debt, even in bankruptcy, is usually very difficult.
Which Taxes Can Be Discharged
The IRS has strict limits on which taxes can be eliminated in bankruptcy. First, tax debt is typically only discharged in Chapter 7 bankruptcy. If you file Chapter 13 bankruptcy, you’ll likely end up paying some or all your tax debt. Second, you can only typically discharge income taxes. If you owe any other type of tax, like payroll tax or self-employment tax, you cannot discharge it in almost all cases. Third, you must not have committed fraud on the tax you owe. For example, if you filed a tax return using the wrong Social Security number on purpose, you almost always can’t discharge the tax you owe. Finally, the taxes to be eliminated in bankruptcy generally must have been “due and owing” for more than three years before you file for bankruptcy.
Tax Filing Requirements
The IRS generally must have internally acknowledged or assessed your tax debt 240 days prior to the day you file bankruptcy.
Your bankruptcy case may be dismissed if you do not file a tax return that becomes due after the commencement of the bankruptcy case or obtain an extension for filing the return before the due date.
For Chapter 13 bankruptcy cases filed after October 6, 2005, your tax returns for the previous four years of the bankruptcy filing must have been filed before you can file bankruptcy. For example, if you are filing bankruptcy in 2007, your tax returns back to 2003 must have been filed before the first creditors’ meeting.
Alternatives to Bankruptcy
The downside to bankruptcy is that it’s entered in the public records section of your credit report and stays there for probably ten years. You’ll likely experience damage to your credit score and have trouble getting new credit for a few years after filing bankruptcy. You may be able to avoid bankrupting taxes by settling the debt with the IRS. You may be able to make a partial payment, settle the debt for a fraction of what you owe, have some or all penalties waived, or request innocent spouse relief of taxes your spouse owes. Since tax situations are complicated, it’s probably best to get help from an experienced tax professional.