Filing for bankruptcy can offer relief from certain IRS tax debts, but the process is complex, and not all tax obligations can be discharged. Whether or not your tax debt is forgiven in bankruptcy depends on several factors, including the type of tax owed, the timing of the debt, and the type of bankruptcy you file.
For tax debts to be discharged in bankruptcy, the following conditions must generally be met:
- The tax debt must be at least three years old: Income taxes are typically eligible for discharge if the return for that year was due at least three years before filing for bankruptcy.
- The tax return must have been filed at least two years prior to the bankruptcy filing: If you filed a return late, it must have been filed at least two years before the bankruptcy case.
- The tax assessment must be at least 240 days old: The IRS must have assessed the debt at least 240 days before filing for bankruptcy, or the tax must not have been assessed at all.
There are two primary types of bankruptcy filings relevant to tax debt:
- Chapter 7 Bankruptcy: This involves the liquidation of assets to pay creditors. In some cases, older income tax debts that meet the above criteria may be discharged.
- Chapter 13 Bankruptcy: This sets up a repayment plan where debts are paid over a 3 to 5-year period. Some tax debts may be discharged at the end of the payment plan.
It’s important to note that non-income tax debts, such as payroll taxes or fraud-related debts, are typically not dischargeable through bankruptcy. Additionally, bankruptcy will not eliminate liens the IRS has placed on your property, even if the underlying debt is discharged.
Bankruptcy can be a powerful tool for managing overwhelming tax debt, but it should be approached with caution and the advice of both a tax and bankruptcy professional.