IRS Question: Can I Erase Tax Debt in Bankruptcy?

Question: I am filing bankruptcy to get out from underneath debt brought on by some bad financial decisions. Can I discharge in bankruptcy the IRS back taxes I owe for tax years 2008 and 2009 that amount to roughly $25,000? I am struggling financially to pay off all the debt I incurred in this mess but am particularly overwhelmed with the tax debt. Do I have any chance at tax relief through the bankruptcy?

Answer: This is a great question, and one I am asked often. With the recession in its fifth year, financially distressed consumers like you are turning to bankruptcy as a means of wiping their financial slate clean including getting rid of tax debt. The good news is that you do have some tax relief options regarding bankruptcy discharges of tax debt. There are three general rules that must be met in order to discharge income taxes:

  1. The tax liability must be 3 years old or older from the “due date” of the return, including extensions.
  2. The tax returns themselves (Substitutes for Returns are not eligible for discharge) had to have been filed at least 24 months before the petition date.
  3. 240 days must pass from date of assessment. There are certain events that can “toll” (stop) the 240 day “clock”.

While not all bankruptcy cases result in a complete discharge of debts; there are instances where IRS tax debt can be discharged through tax relief bankruptcy.  Here are some guidelines for you to consider, including other means of debt relief that bankruptcy:

IRS Tax Debt Erased in Bankruptcy-Strict Rules Apply

The IRS does not like to mention bankruptcy as a way to remove tax liabilities, but many taxes, IRS penalties and interest qualify for complete discharge in bankruptcy. The catch: there are strict rules governing this. Changes to the Consumer Bankruptcy Law in 2005 affect the ability to discharge income taxes. As a result, the IRS uses rigorous criteria to determine if the taxpayer’s income tax liabilities qualify for forgiveness.

Bankruptcy Is Not the Only Option

If tax issues are not your main issue, the Offer in Compromise program may be a better option than tax relief bankruptcy. Here are some guidelines to consider:

  • If your entire debt consists mostly of creditors you are having difficulty paying and very little IRS debt, bankruptcy may be your best option.
  • If your major creditor is the IRS, an attorney or Certified Tax Resolution Specialist can help you consider options like an IRS installment agreement or offer other solutions that may work better for your financial circumstances.

Resolve Tax Bankruptcy-Hire Expert Tax Representation

Bankruptcy is a complicated, legal matter that should be seriously considered because your financial life is on the line. I would encourage anyone faced with bankruptcy to seek out experienced legal counsel such as an attorney or Certified Tax Resolution Specialist with expertise in handling tax relief bankruptcy cases. These qualified tax professionals will assess your tax liabilities and determine if you are eligible for a full discharge. If that is not a viable option, they will also suggest other IRS solutions to help you get your financial life back on track.

More Tax Help, IRS News and Tax Relief Tips:

  1. IRS Bankruptcy-Five Tax Relief Options for Back Taxes
  2. Tax Relief-Bankruptcy and Tax Debt
  3. Delinquent and Unfiled Tax Returns? 8 Steps to Resolving Them
  4. Tax Resolution Expert-Five Reasons to Hire One
  5. IRS Helps Unemployed Avoid Penalties

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