Bankruptcy Protection: Taxes and the IRS | FilingForBankruptcyOnline.com

If you owe taxes to the IRS that you cannot pay, there are a few ways you can discharge that debt. One of them is by filing bankruptcy. If you can successfully file Chapter 7 bankruptcy then all your allowable debts can be fully discharged. If you choose Chapter 13, then some debts will be discharged and a payment plan through the court is put in place to allow you to pay the rest over a 5-year period.

Some tax debts are not allowed to be discharged in bankruptcy; there are certain criteria the tax debts must meet to be allowable. The five criteria are:

The due date for filing must have been at least 3 years prior
The tax return was valid and not fraudulent
The person who wants to file bankruptcy did not try to evade taxes
The tax assessment must be fairly old—at least 240 days
The tax return was filed a minimum of two years ago

Tax debts that can meet those 5 criteria are eligible for a full discharge under either Chapter 7 or 13 bankruptcies. Tax debts that don’t meet all 5 of those conditions are not dischargeable under bankruptcy.

Non-Dischargeable Tax Debt

If you have tax debt that can’t be discharged with a bankruptcy, then under Chapter 13 bankruptcy you’ll be put on a payment plan to help you pay the tax debt. While some people are quite afraid of the IRS, under a Chapter 13 bankruptcy they’re viewed the same as any other creditor and have no more or less rights than anyone else to whom you owe money.

If the debt cannot be paid during that time, you may think you’re not much better off than you were before the bankruptcy, but there are options.

It’s important to talk to the IRS and be honest about your situation. The amount you owe really isn’t set in stone. They have the ability to negotiate with you to compromise your tax bill if there’s the possibility that you don’t really owe that much in taxes or that you truly don’t have the resources to pay what is owed.

The way the IRS figures one's ability to pay can be tricky. They figure what it should cost you to live for 50 months or however long is left in the time period they’re allowed to collect the back taxes. Then any income you make beyond that amount is what they expect to be paid, until the debt is resolved. If you can show that you only make the amount that they consider to be the cost of living in your area, a compromise might be possible. Their cost of living figures are widely believed to be far below the actual numbers, but if you cannot pay the remaining tax bill, asking for a compromise is a first step to try to resolve the situation and avoid future problems.

Consult with a bankruptcy lawyer for more advice on taxes and bankruptcy, and to discuss your particular situation.

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