Many people end up in significant debt over unpaid tax liabilities. Owing the IRS money is serious business and the IRS doesn’t take tax debt lightly.
Many people experiencing financial trouble wonder whether tax debts are dischargeable through bankruptcy. Some say that tax debt is not dischargeable in bankruptcy. While this may be true in many situations, there are circumstances in which tax debts may be eligible for discharge in bankruptcy.
Tax Debt Qualifications
In general, the IRS prefers for taxpayers to set up a payment plan directly with them. The IRS offers installment plans and tax debt settlement agreements, called an Offer In Compromise. However, when people fall on hard times and cannot pay, tax debts may be eligible to be resolved through a Chapter 7 or Chapter 13 bankruptcy.
A tax debt may be eligible for discharge if it meets the following conditions:
Income taxes. To be eligible for bankruptcy discharge, tax debts must be categorized as income taxes. Property taxes and payroll taxes are not eligible for a bankruptcy discharge.
Legitimate. Taxes that are acquired fraudulently or where payments was intentionally evaded will not be eligible to be discharged.
Three years old. Tax debts that are at least three years old, from the time of filing may be eligible for discharge. Tax debts less than three years old will not be eligible. A tax return was filed for the debt seeking to be discharged.
Tax Return on file. To have a tax debt eligible for discharge, the debt must have had a corresponding tax return filed at least 2 years prior to filing for bankruptcy. The debts must also have been assessed at least 240 days or more from the time of the bankruptcy filing.
Tax debt is a stressful issue that can complicate anyone’s financial situation. Anyone owing the IRS money is at risk of serious collection actions such as wage garnishment, tax liens and bank levies. A qualified bankruptcy lawyer or tax attorney can help settle your tax debts and protect against IRS penalties.