Can you eliminate tax debt through bankruptcy? by Sophie Kinsella

Bankruptcy is a highly intricate legal process and there are a lot of wrong notions about it. For instance, many people (including some financial experts) believe that tax debt cannot be discharged in bankruptcy. This is not correct. Bankruptcy can offer you tax debt relief.  

It is possible to reduce your tax debt through Chapter 7 and Chapter 13 bankruptcy under specific circumstances. However, certain conditions need to be fulfilled if you want to discharge IRS tax debt through bankruptcy. Let’s discuss in detail. 

1) The three year clause 

IRS tax debt can be wiped out by filing Chapter 7 bankruptcy if it satisfies a three year rule. This means that the tax which you owe to the IRS should be pending for at least three years before you file for bankruptcy. Otherwise, your tax debt will be non-dis chargeable. Also, the pending taxes should be assessed by the Internal Revenue Service at least 240 days before filing.

 

2) Tax Fraud 

Tax debt will be non-dis chargeable if the debtor files a fraudulent tax return. For example, a tax-payer would not be eligible for tax debt relief if he intentionally reports wrong income. Any wrong information on the tax return will be considered as fraudulent.   

If the above conditions are fulfilled, then it is possible to wipe out your income tax debt by filing chapter 7 bankruptcy.  

Property taxes can be discharged if your tax was payable without penalty more than a year before you filed bankruptcy. 

You should understand that tax liens survive bankruptcy. However, the value of the tax lien would be reduced to the value of the equity in the property. Also, you won’t be bothered with tax liens if you do not have any valuable property.  

Tax and Chapter 13 bankruptcy 

If you file Chapter 13 bankruptcy then you may not have to pay your tax debt in full. However, the conditions mentioned above (three years clause and tax fraud) must be satisfied. Another advantage with Chapter 13 bankruptcy is that the IRS cannot start collection activities for a certain period of time. Finally, interest and penalties stop when you file Chapter 13 bankruptcy. This does not happen in case an IRS installment agreement (IA). Moreover, the IRS cannot ask you for more than what has been decided by the bankruptcy court.   

A smart strategy to discharge taxes 

It is legally possible for a debtor to file more than one type of bankruptcy. What is the justification for such an action? Fred W. Daily, a reputed tax lawyer, explains the situation. When a debtor files Chapter 7 bankruptcy, the dis chargeable taxes are wiped out. Next, he can file Chapter 13 bankruptcy to pay off the remaining taxes through an affordable repayment plan. This makes your life easy and stress free. 

Discharging taxes through bankruptcy can be a tricky business. So keep the above points in mind and consult a tax attorney before you proceed.