Debt relief company commercials make eliminating tax debts seem like a breeze. However, the state overseeing your debt or the Internal Revenue Service (IRS) only chooses to discharge tax debt under certain circumstances. Generally, filing for bankruptcy does not affect past due taxes.
Certain debt challenges, including back taxes (taxes you owe from a prior year), may resolve through bankruptcy.
Tax debt Chapter 7 bankruptcy
Whether filing for bankruptcy may discharge tax debt depends on your ability to meet five factors: properly filing your tax return, the date you filed the return, how old the debt is, when the IRS assessed the debt and the type of taxes owed. The IRS will need to assess your income tax debt at least 240 before your bankruptcy filing. Additionally, your debt must be more than three years old, you did not commit any willful tax fraud or evasion and the taxing authority does not hold a lien on your property.
Tax debt in Chapter 13 bankruptcy
In this type of bankruptcy case, the judge will also look to the same five factors. If your debt meets these factors, then the court trustee may arrange for a partial repayment plan depending on how much the court determines you can reasonably repay. In the event your case does not meet these factors, you will likely need to repay the full amount of past-due taxes and any associated penalties.
Bankruptcy may help discharge a portion of the tax debt you owe, even though it may prove to be more challenging than your other debts.