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Chapter 13 bankruptcy may help MA residents with tax debt relief

Many residents of Massachusetts may, as a result of financial challenges, get behind on their taxes even though they are honest people who ordinarily would pay their taxes promptly. Even for these relatively "innocent" delinquent taxpayers, however, the penalties can be harsh. In the case of IRS taxes, interest on balances owed compounds daily and sometimes taxpayers additionally face a penalty of up to 25 percent of the taxes owed.

One expert says that the best way for a taxpayer to avoid a crippling tax debt is to file a tax return on time every year. While the IRS has programs that allow for taxpayers to pay what they owe over time, simply not filing a tax return can lead to a substantial penalty. It is, therefore, almost always better to file a return, even if the taxpayer cannot pay all of the tax.

The expert also noted that the IRS pays particular attention to the income and deductions that a taxpayer reports in connection with a business. One thing that small, part-time, entrepreneurs need to be aware of is that the IRS may choose to call a business a "hobby" if the taxpayer consistently shows a loss on the business and then takes that loss as a deduction.

A Chapter 13 bankruptcy can also be helpful to a person struggling under the weight of tax debt. While not all taxes can be discharged through Chapter 13 bankruptcy, a Chapter 13 repayment plan will oftentimes allow a taxpayer to reduce interest payments and penalties while paying off the taxes over time. For those Massachusetts residents who need tax debt relief, consulting with a local bankruptcy attorney may prove to be a wise step in the right direction.

Source: The Salt Lake Tribune, "Can taxpayers fight the IRS?" Karen M. Summerhays, July 22, 2013