How to File for Bankruptcy to Eliminate IRS Tax Debt
How to File for Bankruptcy to Eliminate IRS Tax Debt
If you owe the IRS back taxes that you can’t pay, bankruptcy may be an option to eliminate some or all of that debt. I know tax debt can feel overwhelming – the IRS has a lot of power to collect what you owe. But there are ways bankruptcy can help provide relief, so don’t lose hope!
In this article, I’ll walk through when and how bankruptcy can eliminate IRS tax debt. I’m not a lawyer, so definitely talk to a bankruptcy attorney to understand your specific situation. But hopefully this gives you a good starting point on your options.
Can Bankruptcy Eliminate Tax Debt?
The first thing to know is that not all tax debt can be eliminated through bankruptcy. Income tax debt has the best chance of being discharged, but even then, it depends on your specific circumstances.
Here are some key things to understand about discharging tax debt in bankruptcy:
- Only federal income tax debt can potentially be discharged – other types of IRS debt like payroll taxes or fraud penalties generally can’t.
- The income tax debt must be at least 3 years old.
- You must have filed a tax return for the debt at least 2 years before filing for bankruptcy.
- The IRS must have assessed the debt at least 240 days before you file.
- You can’t have willfully attempted to evade or defeat paying the tax.
- The IRS can’t have filed a tax lien against your property.
As you can see, the rules around discharging tax debt in bankruptcy are complex. But the bottom line is – income tax debt has the best shot, as long as it meets certain requirements.
How Bankruptcy Works for Tax Debt
If your tax debt meets the requirements, filing for bankruptcy can stop IRS collection efforts and potentially eliminate some or all of what you owe. Here’s a quick overview of how it works:
Chapter 7 Bankruptcy
Chapter 7 bankruptcy liquidates your assets to pay creditors. Any remaining unpaid debt is discharged. Here’s how it could help with IRS tax debt:
- The automatic stay immediately halts IRS collection efforts.
- Eligible tax debt can be discharged, meaning you’re no longer legally required to pay it.
- If you have assets, the trustee may use them to pay down your tax debt before it’s discharged.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy sets up a 3-5 year repayment plan to pay down your debts. Here’s how it could help with tax debt:
- The automatic stay stops IRS collection efforts.
- Your repayment plan allows you to catch up on tax debt over time.
- Some tax debt may still be discharged at the end of the plan.
The bottom line is that both Chapter 7 and Chapter 13 bankruptcy can provide immediate relief from IRS collection efforts. And they offer potential for eliminating some tax debt completely.
The Bankruptcy Process
Filing for bankruptcy involves paperwork, court hearings, and working with a trustee. Here are the basic steps:
- Meet with a bankruptcy attorney – They can advise if bankruptcy is right for your situation.
- File bankruptcy paperwork – This includes forms detailing your assets, debts, income, and expenses.
- Attend the meeting of creditors – You’ll be questioned under oath by the trustee and any creditors.
- Wait for discharge – If approved, the court formally discharges your eligible debts.
- Complete additional requirements – Things like debt counseling may be required.
The process takes 3-6 months. Throughout, you’ll work closely with your attorney and the bankruptcy trustee assigned to your case.
Strategies for Eliminating Tax Debt
To give yourself the best chance of eliminating tax debt through bankruptcy, here are some key strategies:
- Determine discharge eligibility – Review tax debt age, filing history, tax liens, etc. to understand what can be discharged.
- Request IRS tax transcripts – Review dates and details – this helps determine discharge eligibility.
- File precisely on the 3-year mark – To meet age requirements, file on the exact date the tax was due.
- File any unfiled returns ASAP – You must be compliant on returns to discharge tax debt.
- Avoid offers in compromise – Making an offer prevents discharge of remaining balance.
With the help of your attorney, you can put together the strongest case possible for discharging your eligible tax debts.
What About Tax Liens?
One major complication with tax debt in bankruptcy is if the IRS has filed a tax lien on your property. Unfortunately, bankruptcy does not make tax liens go away.
The tax debt itself may still be discharged, but the lien remains attached to the property until the taxes are paid in full. So you can’t sell or refinance the property without paying off the lien.
There may be some cases where your attorney can challenge the validity of a tax lien in bankruptcy. But in general, expect tax liens to remain in place.
Alternatives to Discharge in Bankruptcy
If you don’t qualify to discharge tax debt in bankruptcy, all hope is not lost. Here are some alternative options to deal with IRS debt:
- IRS payment plans – Set up monthly payments to pay down tax debt over 6-72 months.
- IRS Offer in Compromise – Settle tax debt for less than the full amount owed.
- IRS Currently Not Collectible – Pause enforced collections if you have no ability to pay.
These programs can provide relief without needing to file for bankruptcy. Talk to the IRS or a tax professional to understand if you qualify.