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Eliminating Tax Debt in Bankruptcy

Owing the IRS tax money is extremely stressful. It is common for Americans to accrue income tax debt. Yet, it is the most difficult type of debt to pay off. Under specific circumstances, the Bankruptcy Code permits the discharge of some income tax debt. Each Chapter treats tax debt elimination differently

Liquidation of income taxes under Chapter 7

In order to qualify for liquidation under Chapter 7, your tax debt must comply with each of the following rules:

  • Three years: Your tax debt must originate from a tax obligation at least three years before you file your bankruptcy petition.
  • Two years: You had to actually file your tax return two years before filing your bankruptcy petition; it won't count if the IRS filed a substitute tax return for you.
  • 240-days: An IRS assessment of your taxes must be done at least 240 days prior to your bankruptcy filing.
  • Income taxes only: Taxes related to payroll or other tax penalties do not qualify for discharge through bankruptcy.
  • Exceptions for tax fraud or evasion: If you are found guilty of tax fraud or willful attempt to evade paying income taxes, your income tax debt cannot qualify for discharge.

You may reorganize tax debt through Chapter 13

If your income tax debt follows the rules outlined above, you may include it in a Chapter 13 repayment plan. It is likely that you will make more favorable repayment terms through bankruptcy than negotiating directly with the IRS. In addition, a Chapter 13 bankruptcy judge can determine if your tax debt qualifies for less than the full amount that you owe. Once the court approves your plan, the bankruptcy trustee assigned to your case collects your monthly payments. Chapter 13 allows you to extend your payments over three to five years.

If your debt burden includes back taxes, consider filing for bankruptcy to ease your load. Our Orange County bankruptcy attorneys represent clients throughout Southern California. Contact the Fishback Law Corp for a free consultation.

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