Can I Use Bankruptcy to Eliminate Tax Debts?

 Posted on July 06, 2021 in Tax Debts

There are many different types of debts that can cause difficulty for an individual or family. When money is owed to multiple creditors, a person may struggle to make ongoing payments while also managing their regular expenses. Tax debts can be especially difficult to deal with, since the IRS may take action in several ways to collect taxes that a person owes. The IRS may garnish their wages, seize funds in a bank account, intercept tax returns, or placing a tax lien on real estate or other property. In cases involving IRS tax levies, a debtor will want to understand whether filing for bankruptcy may allow them to discharge their tax debts.

When Can Tax Debts Be Discharged Through Bankruptcy?

As with other types of debts, the collection of tax debts can be stopped by filing for bankruptcy. The automatic stay that goes into effect following a bankruptcy filing will prevent the IRS from implementing tax levies. A debtor can then determine whether the tax debts they owe are eligible to be discharged.

Tax debts can only be discharged if a person has met certain requirements. Only state or federal income taxes can be discharged, so bankruptcy will not eliminate debts for payroll taxes, capital gains taxes, or other types of taxes. In addition, a taxpayer will need to show that:

• The tax debts they owe were based on a tax return that was due at least three years before they filed for bankruptcy.

• They filed a tax return for the applicable tax debts at least two years before filing for bankruptcy. 

• Their tax debts were assessed by the IRS, such as through a tax audit, at least 240 days before they filed for bankruptcy.

• They have filed all required tax returns for the tax years that ended within four years before filing for bankruptcy.

• The tax debt is not based on any form of tax fraud or tax evasion, such as willfully providing false information on a tax return.

If a tax debt is dischargeable, it may be eliminated through Chapter 7 bankruptcy, and once the bankruptcy process is complete, the taxpayer will no longer be required to pay the taxes owed or any related interest or penalties. If a person does not qualify for Chapter 7, they may include tax debts in a Chapter 13 bankruptcy repayment plan, and any remaining tax debts will be discharged once the plan has been completed. During the bankruptcy process, a taxpayer must file all required tax returns and pay their current taxes, and failure to do so could result in their bankruptcy case being dismissed. 

Contact Our San Antonio Bankruptcy and Taxes Attorney

If you owe taxes or have other types of debts, the Law Offices of Chance M. McGhee can help you understand whether you can receive debt relief through bankruptcy, and we will also work with you to determine whether there are other options available to you. Contact our New Braunfels bankruptcy lawyer at 210-342-3400 to schedule your free consultation today.

Sources:

https://www.thebalance.com/bankruptcy-and-tax-debts-3192950

https://www.irs.gov/businesses/small-businesses-self-employed/declaring-bankruptcy