Paying taxes is basically a fact of life for the majority of Americans, but sometimes, tax debt can grow to a level where it is very difficult to repay. When your debt starts to take over your financial situation, filing for bankruptcy may be the only option that you have left to take control again. While filing for bankruptcy can get you out of some debts, getting out of tax debt can be difficult.
Tax Debt and Bankruptcy
As a general rule, it’s tough to get tax debt relief through bankruptcy. Only certain types of taxes can be discharged through Chapter 7 bankruptcy. If you file for Chapter 13 bankruptcy, your tax debt will not be discharged as your debts will be entered into a repayment plan that is set up by the court. Only income taxes can be discharged through bankruptcy protection. If the debt comes from capital gains, payroll tax, or any other type of tax, it cannot be discharged through bankruptcy.
Requirements In order to get tax debt relief through a Chapter 7 bankruptcy, you must meet some specific requirements that are set forth by the Internal Revenue Service. One of the main requirements is that the debt must be at least three years old before it can be considered for discharge. You also cannot discharge tax debt if you are guilty of tax fraud or tax evasion at any point in the past. If you want to discharge a tax debt, you must have filed a tax return for that debt at least two years before you file for bankruptcy. This means that you cannot decide shortly before you file for bankruptcy that you want to have your tax debts discharged. In order to qualify for the tax debt discharge, your debt also has to meet some assessment requirements. The debt must have been assessed by the Internal Revenue Service at least 240 days ago or not at all. If the tax debt has been assessed sooner than that, you will not be able to qualify for the tax debt discharge when you file for bankruptcy.
Tax Liens
The IRS has many tools that it can use to try to collect the money that you owe in taxes. If you have not paid your taxes, the IRS can file a tax lien against some of you property. For example, the IRS could file a tax lien on your house or on your vehicle. If a tax lien has already been placed on some of your property prior to filing for bankruptcy, you will not be able to get rid of the tax lien. This means that even if you get some of your other debts discharged the tax liens will stay in place.
Considerations
Getting rid of some of your tax debt through bankruptcy is possible. Just don’t expect to be able to completely erase tax debts from multiple years. You will still be responsible for the tax debts that are more recent than three years old.
About the Author: Sheryl Fabia is an in-house writer for Franklin Debt Relief. She writes articles on various financial matters and has them published across the web.