The issue of unpaid taxes is a serious matter as the IRS does not handle tax debts lightly. One common area of concern for people experiencing financial trouble is how to manage their tax debts with a strict budget. Most people assume that tax debts can be handled like any other debt in a bankruptcy case. While some tax debts may be eligible for a discharge in bankruptcy, there are certain rules and restrictions about whether or not a tax debt qualifies.
Tax Debt Discharge
Some tax debts are eligible for discharge under a Chapter 7 bankruptcy, while other people may only find approval for a Chapter 13 repayment plan. The difference here relates to the financial status of the filer and whether or not they qualify for Chapter 7 bankruptcy. Those whose income does not pass the means test may only be eligible to file their tax debts under Chapter 13.
It is important to note that not all tax debts qualify for a bankruptcy discharge. In order to qualify for bankruptcy tax debts must meet certain criteria. First, the tax debt must be related to a tax return that was due at least three years prior to the filing. The tax debt must also be related to a tax return that was filed with the IRS at least two years prior to filing. The IRS must have assessed the tax liability at least 240 days prior to the filing of the bankruptcy case. Last, the tax return must be free of any suspicions of fraud and the taxpayer must be free of any tax evasion charges.
If a tax debt meets these requirements, it may be eligible to receive a bankruptcy discharge. However, the taxpayer must also be current on filing tax returns for the previous four years and provide a copy of their most recent tax return to the court upon filing.