Q: What options does a taxpayer have if back taxes and IRS debt are not dischargeable in bankruptcy?

A: Back taxes are not always dischargeable in bankruptcy proceedings. Personal income taxes, the only type of IRS back taxes eligible for discharge, are subject to a rigorous five-part threshold test outlined in the previous FAQ before the bankruptcy court will even consider the issue of dischargeability.

The taxpayer emerging from bankruptcy with an undischarged back-tax debt can take heart, however. As with any back-tax liability situation, a taxpayer can file an Offer in Compromise (OIC) to settle the tax debt for less than the amount owed the IRS. To qualify for the Offer in Compromise program, a taxpayer must present a convincing, well-documented case that the taxpayer has insufficient assets, or earnings prospects, to pay off the tax liability.

Another possibility for those emerging from Chapter 13 bankruptcy is entering into some type of IRS installment plan to pay off the entire amount of back taxes owed. There are several variations on installment plans, which generally run from three to five years. They include the standard IRS payment plan with equal payments due over the term, a step-up plan that increases the amount of the regular payments as a taxpayer's income increases, a variable or seasonal plan that allows the installment payment to increase and decrease according to expected cash flow or cyclical income, and an installment plan with a built-in balloon payment due with the final payment.

Taxpayers unable to discharge back taxes in bankruptcy can also try to be classified as "temporarily uncollectible" due to insufficient assets. The IRS statute of limitations for collection of back taxes is the amount of time a taxpayer was in bankruptcy plus six months.

And keep in mind that even if taxes are dischargeable in bankruptcy, this route may not be in a taxpayer's best interests, especially if the back-taxes obligation can be reduced without resorting to bankruptcy, which can adversely affect credit ratings for ten years. If a taxpayer's major creditor is Uncle Sam, a tax attorney or Certified Tax Resolution Specialist can pinpoint the tax relief option that will ultimately result in the best resolution.

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