If you are struggling with the burden of owing back taxes to the IRS, you may be wondering if bankruptcy is a possible solution. Before you file a bankruptcy petition, take the time to consider if this step is advantageous for your situation. Whether bankruptcy can help discharge federal taxes owed depends on a variety of circumstances including which type of bankruptcy method you choose. The services of a well-informed tax attorney such as Len Stauffenger, Esq., can assist you in your quest for tax and debt relief.
Get immediate, temporary relief by filing a bankruptcy petition
Once you submit a bankruptcy petition, an automatic stay prevents creditors from attempting to collect from you, and this does include the IRS. The stay prevents the IRS from issuing a tax lien or seizing your property. However, this stay is often temporary, and creditors can apply to have it lifted. Let’s look at how the two most commonly filed bankruptcy choices — Chapter 7 and Chapter 13 — handle federal tax debts.
Gain more time by filing Chapter 13
In most cases, a Chapter 13 bankruptcy focuses on rearranging and adjusting your debts into easier-to-pay amounts and allows you more time to pay them off. This restructuring would include your federal tax debts. Although you still owe them, you may pay them over the length of your Chapter 13 repayment plan, giving you additional time to recover your financial footing.
Discharge tax debts by filing Chapter 7
A Chapter 7 bankruptcy eliminates your obligation to pay off most of your debts, and it also provides the best opportunity to discharge tax debts. Several conditions must be met to find relief from back taxes owed. Also, many circumstances may cause one or more of the of the rules below to vary in duration. It always pays to consult a professional.
- The taxes due must be income taxes. You cannot discharge penalties or certain types of payroll taxes.
- There must be no record that you willfully attempted to defraud the government. Using a false Social Security number or knowingly filing inaccurate tax returns makes you ineligible to discharge your tax debt through bankruptcy.
- Your tax return and the corresponding tax debt must have been due three years before you file your bankruptcy petition.
- You should be current on the tax return for the existing debt. That means you submitted it on time, including extensions, at least two years previously.
- The IRS must have assessed your liability 240 days before your bankruptcy petition date.
While you may be able to discharge some tax debts, unfortunately, you can’t remove a federal tax lien that is already in place on your property. You need to pay off the claim should you decide to sell the property. Bankruptcy also does not prevent the IRS from processing further taxes to your account if you continue to miss estimated payments or withhold incorrect amounts.
We provide expert advice
Len Stauffenger, Esq., can help you learn the facts on discharging tax debt through bankruptcy. His team can walk you through the bankruptcy options for which you are eligible, make sure your withholding amounts are set up correctly to prevent future problems and help you choose solutions to ease the stress of overhanging debt.