If you’ve fallen behind in tax payments and have no chance of paying back the debt, it used to be you had few options. However, with the bankruptcy laws changing in recent years, you can now eliminate tax debt anywhere in the US with Chapter 7 bankruptcy. And with Chapter 13 bankruptcy you can pay in installments.
There is some fine print to those statements. The best thing you can do is a contact a professional bankruptcy attorney in your state who can consult with you on options. A bankruptcy attorney can tell you restrictions and requirements on eliminating tax debt by filing Chapter 7 bankruptcy. The attorney can also explain how Chapter 13 bankruptcy is now much more common than ever before.
Let’s go over the 5 requirements you have to meet in order to eliminate tax debt.
1-Your tax return must have been due at least three years ago.
That means, if you file behind one year or two years ago, you cannot get the tax debt discharged yet.
2-The return then must have been filed at least two years ago with the IRS.
3-The tax debt must have been assessed a minimum of 240 days ago.
The IRS must recognize the tax debt at a minimum of 240 days ago, in other words. So if you file for bankruptcy and want the tax debt eliminated, the debt needs to have been present for 240 days or longer, and the IRS must have in some way recognized this debt.
4-The tax return itself must be completely truthful.
If there are errors, intended or not, the tax return is fraudulent in many respects, and the debt cannot be discharged.
5-Last, you cannot be guilty of tax evasion.
As you can see it can get complicated. However, in a nutshell, all you really have to worry about is the time frame, that the IRS recognizes the debt, that the tax return is correct, and you’re not guilty of tax evasion. That likely keeps most options on the table.
What a Bankruptcy Attorney Can Do
There are some more footnotes to this discussion. You should at a minimum consult with bankruptcy attorneys. While it’s true you can discharge your tax debt completely with Chapter 7 bankruptcy, in some cases home owners may have to pay back in other ways. This is because you cannot discharge a federal tax debt. If the IRS reported a tax lien on your home, you may have to pay back that lien before you can sell it.
A professional bankruptcy attorney knows how to handle not only situations in the courtroom, but all the paperwork involved in handling back taxes. This can be quite complex. You may try and do it yourself, but a few mistakes and you may be in trouble.
But if you successfully file Chapter 7 bankruptcy, you can expect major debts to be eliminated. If you file for chapter 13 bankruptcy, debts like taxes can be paid over a more reasonable time frame. Choosing between the two is a discussion between you and your bankruptcy attorney.