Bankruptcy may be best option to eliminate a tax bill.
If you owe past due federal taxes that you cannot pay, bankruptcy may be an option. Other options include an IRS Payment Plan or an Offer in Compromise. Certain tests must be met and not all taxes qualify for being included in a bankruptcy. However, while in a bankruptcy IRS collection efforts are paused until the bankruptcy term is over. This benefit may be enough to look at bankruptcy as an option to deal with a tax bill.
Five Rules to Allow Discharge of Tax Debts
For a tax debt to be discharged in Chapter 7 and Chapter 13 bankruptcy petitions, five rules apply:
- The due date for filing a tax return is at least three years ago, including extensions.
- The tax return was filed at least two years ago (measured from the date on the return).
- The tax assessment is at least 240 days old.
- The tax return was not fraudulent or frivolous.
- The taxpayer is not guilty of tax evasion.
For individuals, the most common type of bankruptcy is a Chapter 13. Before you consider filing a Chapter 13 here are some additional things you should know:
- You must file all required tax returns for tax periods ending within four years of your bankruptcy filing.
- During your bankruptcy you must continue to file, or get an extension of time to file, all required returns.
- During your bankruptcy case you should pay all current taxes as they come due.
- Failure to file returns and/or pay current taxes during your bankruptcy may result in your case being dismissed.
There are some tax debts that are not dischargeable. Tax debts that arise from unfiled tax returns are not dischargeable. The IRS routinely assesses tax on unfiled returns. These tax liabilities cannot be discharged unless the taxpayer files a tax return for the year in question. Payroll tax problems relating to businesses and trust fund recovery amounts cannot be discharged either.
Sometimes a bankruptcy is the best option to relieve your tax bill. If the requirements are met, you can eliminate some tax bills this way.