Bankruptcy Tax: Discharging IRS Taxes in Bankruptcy
Taxpayers are often under the mistaken belief that their tax liabilities are not dischargeable in bankruptcy.
Generally older federal income tax debts are dischargeable in bankruptcy. These old tax debts are tax debts that are more than three years old and for which the tax return, if one was to be filed, was filed more than 240 days prior to filing the bankruptcy petition. Some IRS tax penalties may also be discharged in bankruptcy and taxpayers may be able to halt the accrual of interest during the bankruptcy proceeding. If the tax debt and penalties are not dischargeable in bankruptcy then it is still possible that the tax debt and penalties can be restructured in bankruptcy.
In addition to being able to discharge federal income tax debts in bankruptcy, filing a bankruptcy petition typically halts the IRS’s collections activities. Therefore, bankruptcy may be a viable option to prevent the IRS from levying on wages or other assets.
If a taxpayer’s tax debt is dischargeable in bankruptcy, even the threat of filing bankruptcy can force the IRS to settle the taxpayer's debt on the taxpayer's terms.
There are also several disadvantages to filing bankruptcy. For example, IRS liens may survive the bankruptcy process and, to the extent that the tax debt is not discharged in bankruptcy, the IRS may veiw the taxpayer (who now has fewer debts) as being in a better position to pay the IRS.
The bankruptcy tax laws are constantly changing. An experienced tax attorney can help you determine if bankruptcy is a viable option for resolving your tax debt.
