If you’ve been up to your neck in back taxes, interest, and penalties for a while, it can seem like there’s no way out. You might begin to resign yourself to the notion of forever owing money to the IRS, but fortunately, it doesn’t have to be that way.
You’ve probably heard that it’s impossible to wipe away tax debt with bankruptcy, and there’s a lot of truth to that. You’ll have to stay on the hook for the majority of taxes still owed to the IRS, but if you have any federal income tax debt, you may be able to get rid of that in bankruptcy.
We’ll get into some of the specifics below, but for now, enjoy a sigh of relief: As long as you owe the right kind of tax debt (and meet several other requirements), you can reduce or eliminate your outstanding tax balance with bankruptcy.
Don’t be mistaken, though, into believing this is an easy endeavor – you will still need an experienced and competent bankruptcy attorney to guide you through this process.
Discharging Tax Debt with Chapter 7
Chapter 7 bankruptcy can be an effective tool for clear consumer debt. It can also be effective at clearing tax debt as long as it qualifies for discharge and the tax debtor otherwise qualifies for Chapter 7.
Here are the conditions when tax debt may be dischargeable in Chapter 7:
- Your tax debt is from income taxes. Only income taxes owed to the state or IRS qualify for bankruptcy discharge. All other taxes, such as fraud penalties, payroll taxes, and even tax liens are non-dischargeable.
- Your tax debt is at least three years old. If you’re only a year or two behind on your taxes, you won’t qualify for a discharge. Only debt that’s three years or older may qualify.
- You didn’t willfully evade taxes or commit tax fraud. Your tax debt will not qualify for discharge if you filed a fraudulent tax return, attempted to evade paying taxes, or engaged in other such unlawful activity.
- You filed your tax return. If you wish to discharge tax debt, you must file is associated tax return at least two years before filing for bankruptcy.
- You meet the 240-Day requirement. This requirement means that the IRS assessed your income tax debt at least 240 days before you filed for bankruptcy, or it has yet to do so.
You may be subject to other requirements based upon your location or unique situation. For this reason, it’s advisable to consult with an attorney to learn more about clearing tax debt with bankruptcy before taking any action.
Do You Need Legal Assistance?
Tax season is only a few months away, which means now’s a good time to consider your options when it comes to dischargeable tax debt. If you would like to learn more about how filing for Chapter 7 bankruptcy can help you reduce or eliminate your income tax debt, our attorney at Nguyen Law Group can help.
Contact us online for more information and to request a consultation.