If you can’t pay your outstanding IRS debts and other tax debts, you may consider filing IRS bankruptcy for relief. However, some types of debt, including tax debts, can’t always be discharged in bankruptcy. Fortunately, in certain circumstances, you may be able to eliminate your tax debts through a tax bankruptcy. Consult the information below to learn more about this possibility.
Can My Back Taxes Be Discharged?
Three rules within the United States Bankruptcy Code determine whether you can discharge your back taxes: the three-year rule, the two-year rule and the 240-day rule. These requirements must all be satisfied before you can discharge the debt.
The Three-Year Rule
The three-year rule mandates that you can discharge back taxes only if they became due at least three years before you filed for bankruptcy. Thus, if you file for bankruptcy on July 20, 2016, your taxes must have become due on or before July 20, 2013 in order to be included in the bankruptcy.
The Two-Year Rule
The two-year rule mandates that you can discharge back taxes only if you filed the return related to these taxes at least two years before you filed for bankruptcy. This rule allows you to include taxes related to returns that were filed up to one year late.
The 240-Day Rule
The 240-day rule mandates that you can discharge back taxes only if they were assessed by the taxing agency at least 240 days before you filed for bankruptcy. In most cases, the date of assessment is approximately the date you filed your income tax return. However, if you were audited by the IRS or you submitted an amended tax return, your tax assessment date may have changed.
The rules above apply only to income tax debt associated with a properly filed return, as well as penalties and interest associated with income tax debt that qualifies for discharge. You cannot discharge tax debt associated with unfiled returns, income tax penalties associated with tax debt that cannot be discharged, taxes withheld from an employee’s paycheck, sales tax or payroll trust fund taxes.
Additional Considerations For Tax Bankruptcy
Certain events can alter the requirements above. For example, if you make an offer in compromise or you obtain a taxpayer assistance order, these time periods may be suspended while the event is in progress. Likewise, in certain circumstances, your back taxes won’t qualify for discharge in bankruptcy even if you meet all three of the time requirements detailed above. For example, if you are guilty of tax fraud or tax evasion, you cannot typically discharge any of the associated tax debt through bankruptcy even if you have satisfied the three-year rule, two-year rule and 240-day rule.
The Effect of Bankruptcy Discharge on Federal Tax Liens
If the Internal Revenue Service had already filed a federal tax lien against you, the lien will not be removed automatically even if you are able to discharge your back taxes through bankruptcy. Even though the underlying debt has been eliminated, the lien will still exist unless you are able to have it released.
In many cases, the IRS will release a tax lien voluntarily after the associated debt has been discharged through Chapter 7 bankruptcy, especially if you don’t own much property that would be subject to the lien. However, if the IRS does not take this action voluntarily, you can request to have the lien released.
If the IRS believes that you have enough assets to make the lien valuable, your request for release will most likely be denied. In this case, you may be able to settle the tax lien for less than the full amount you owe by making a lump sum offer to the IRS. Alternatively, if you cannot negotiate a settlement and you cannot afford to pay, you may attempt to wait for the lien to expire. However, you should always consult a professional before attempting to wait out a tax lien.
If you filed Chapter 13 bankruptcy, any federal tax liens may have already been included in your Chapter 13 payment plan. In such cases, the lien will likely be released once you have received your discharge.
What If My Tax Debt Cannot Be Discharged In Bankruptcy?
If you don’t meet the requirements to have your tax debts discharged through bankruptcy, you have other options.
- Waiting to file. If you cannot discharge your tax debt because you don’t meet one of the IRS’s waiting period rules, you could wait to file bankruptcy until you are able to satisfy all of these requirements. However, not all taxpayers can afford to wait.
- Offer in compromise. If you cannot afford to pay the full amount you owe and you can’t wait to file for bankruptcy, you can make an offer in compromise in an attempt to settle the debt for less than the total balance.
- Periodic payments. In some cases, you may be able to arrange to pay your tax debt over time in installments, which may reduce the overall financial burden.
- There are many other options that may be available depending on your situation. Consult with the Enrolled Agent’s at Samaritan Tax Relief to see what your options may be.
Samaritan Tax Relief Bankruptcy Representation
One of your most important rights as a taxpayer is your right to have a qualified tax resolution professional, such as an Enrolled Agent (EA), represent you in front of the IRS and/or States and provide tax resolution for your tax liability. In conjunction with our tax attorney partners we can assist you with your tax resolution needs via bankruptcy.
When you hire Samaritan Tax Relief to assist you with your tax relief request via bankruptcy, your case will be assigned to one of our tax attorney partners and we will jointly work on your tax resolution while advocating on your behalf and protecting your interests.
Samaritan Tax Relief is here to help you because when you’re dealing with an unbearable amount of tax debt due bankruptcy may be your only option for tax relief. The worst thing you can do is to do nothing at all? The best decision is to take the necessary first step and to try to obtain some tax help!
Click on the “Get Help” button at the top of the page to take that first step.