Behind on income taxes? Bankruptcy may be a solution

It is the new year and tax season is almost upon us. For those who are behind on their income taxes, the season can be more miserable than it normally is. If you are struggling with tax debt, you may consider bankruptcy as an option. Although it can help with income tax debt, bankruptcy is not always a cure-all. It is therefore important to have an understanding of how bankruptcy treats tax debt, before deciding whether it is right for you.

Bankruptcy's treatment of taxes

Under the bankruptcy laws, income tax debt is treated somewhat differently than other types of debt. Unlike credit card or medical debts, tax debt is not automatically dischargeable. In deciding whether tax debt is dischargeable, a court considers each tax return and tax year separately. As a result, some tax debt may qualify for a discharge, while debt from another tax return or year may not.

In order for income tax to be dischargeable, the bankruptcy laws require it to meet certain criteria:

  • The person filing bankruptcy must have timely filed tax returns for a minimum of two years prior to the bankruptcy.
  • The tax debt in question must be due for at least three years. If the IRS granted an extension on the debt, it must have been due for three years following the extension's due date.
  • The person filing bankruptcy must not have attempted to evade his or her taxes or file a fraudulent tax return.
  • The IRS must have assessed the tax debt a minimum of 240 days before the bankruptcy filing. If there was an attempt on the IRS to collect the debt during this period and it was suspended (for whatever reason), there may be a longer minimum.

Assuming that the tax debt in question meets these criteria, it is completely dischargeable, meaning that the filer is no longer obligated to pay the debt (including late payment penalties).

However, even if the tax debt is not dischargeable, there are several options. Filing for bankruptcy can still help, because it will eliminate other types of debt, allowing you to devote more of your resources to your tax debt. Additionally, you can pay the overdue tax debt in installments over a three to five-year period, if you file for Chapter 13 bankruptcy.

Aside from filing bankruptcy, it is possible to work out a repayment plan directly with the IRS. Another option is to negotiate an offer in compromise with the IRS. This is an agreement that settles past-due taxes for a fraction of the amount owed.

As the right option for you depends on your individual circumstances, it is important to seek the advice of an experienced bankruptcy attorney. An attorney can review your bankruptcy and non-bankruptcy options with you and recommend a course of action that would be best for you.