Tax Debt and Bankruptcy

Resolving Income Tax Debt with Bankruptcy

In determining if Bankruptcy can help resolve your income tax debt challenges, consider the following:

1 – Consider your entire debt profile. Zoom out of your income tax debt and consider your whole financial situation. Would you benefit from a more comprehensive debt management solution that addresses mortgages, loans, auto loans, credit cards, lawsuits, property taxes, excise taxes, payroll taxes, and domestic support obligations? Would you benefit from a more comprehensive (replace with complete) approach to resolving your debt challenges? If you answered yes, then your income tax debt is only part of your debt challenge and looking for a broader debt solution probably makes sense for you. If you are in Texas, give us a call or set up a free zoom consultation.

2 – Is your unpaid income tax debt your only debt concern?
If that’s the case, is the amount of debt large enough to justify looking into Bankruptcy? For example, is discharging $50,000 in stale income tax liability in Bankruptcy meaningful to you? Or, have you unsuccessfully tried to set up a fair repayment plan with the IRS? Would you benefit from a repayment plan structured for up to five years without penalties and interest? If such options sound appealing, a bankruptcy consultation won’t hurt.

3 – If none of these scenarios match your situation and you are not trying to remove tax liens and levies, Bankruptcy may not be an obvious choice.

Requirements for Discharging Income Tax Debt in Bankruptcy

1. The tax liability comes from timely filed income tax returns that were due and filed more than three years from the Bankruptcy filing date.
2. The tax assessment occurred more than 240 days from the date of the bankruptcy filing.
3. Tax returns were filed without fraud and did not evade tax laws.

Generally speaking, if your income tax liability satisfies all these requirements, then there is a good likelihood that your income tax debt is dischargeable.

Chapter 13 and Income Tax Relief

Chapter 13 Bankruptcy can discharge general unsecured tax debt once the case completes. Simultaneously it places the non-dischargeable part of the tax debt in a repayment plan. The combination of discharge and repayment can be a powerful tool in many situations.