Given that tax debt can be as overwhelming as credit card or medical debt, it’s not surprising that people want to know if going through the bankruptcy process can remove that debt from their responsibility. But as with many matters related to bankruptcy, the answer is complicated and depends on individual circumstances. To fully understand if bankruptcy would help with your IRS debt situation, contact an experienced bankruptcy lawyer.

Are Any Tax Debts Wiped Away in Bankruptcy?

There are some instances in which bankruptcy proceedings can erase tax debt. In general, all of the following need to apply for tax debt to be discharged:

  • There was no effort to avoid paying taxes or committing fraud for the tax year in question.
  • The tax returns for the taxes in question were filed at least two years before the bankruptcy case. If it was less than two years, if no return was filed, if the return was filed late, or if the IRS filed a substitute return, the tax debts may be deemed disqualified for discharge.
  • The tax debt was based on wage-related income or business income.
  • The taxes were due at least three years before the bankruptcy filing (including valid extensions).
  • The IRS tax assessment, or the official entry of entering the taxes with the IRS, occurs at least 240 days before the bankruptcy filing.

Note that if the IRS filed a tax lien, that turns the tax debt into an amount required to be repaid, even under bankruptcy.

What Happens to Tax Debt in Bankruptcy?

It depends on the type of bankruptcy. There are various outcomes for people pursuing a chapter 7 bankruptcy, in which unsecured debt is discharged. If the court determines that the tax debt can’t be discharged, the IRS can resume collection processes once that determination has been made. In some cases, the tax debt will be discharged as part of the bankruptcy.

Chapter 13 bankruptcy is based on restructuring debt with an eye to eventually repaying some or all of it. In these cases, there may be some tax debt that can be discharged, and that which can’t be discharged can be built into the repayment plan. It won’t remove the liability, but it could remove the need for collections agents to be involved. The person will pay the amounts due to a court-ordered representative who will disburse the funds accordingly.

Let Us Advise You

Bankruptcy proceedings are complicated, and more so if combined with tax debt. This is an area in which experience and knowledge make a difference. It’s best to bring in an attorney specializing in bankruptcy as soon as possible to work toward the best possible outcomes when the IRS is involved. If you or someone you know needs assistance with IRS debt or bankruptcy, call us at 708-575-1500.