What will happen to my income tax debt in bankruptcy?

During this time of year, people’s thoughts turn from the holiday season to lesser-anticipated things, like tax season. If you are struggling with back taxes, this is a particularly difficult time of the year for you. If your income tax debts are substantial, you may wonder whether filing bankruptcy would help you with your problem. The answer to this question is complicated, as it relies on several factors.

Tax debt and bankruptcy

Tax debt is treated differently in bankruptcy than other types of debt. In order for income tax debt to be discharged in bankruptcy, it must meet certain criteria:

• The return for the taxes in question must have been filed with the appropriate agency at least two years before you file for bankruptcy.
• The income taxes in question must have stemmed from a return that was due at least three years before you filed bankruptcy. If you received any extensions from the IRS, three years must have passed since the new due date.
• The IRS must have assessed the tax at least 240 days before you filed bankruptcy. An assessment can include a final assessment, a determination from an audit or a balance due that you reported yourself.
• The tax return must have been true and correct and not fraudulent.
• You must have not been convicted of tax evasion.

In determining whether the tax debt meets these criteria, each taxable year is considered separately. If these criteria are met for the year, the tax debt due for that year is dischargeable. Once discharged, you are under no obligation to repay it.

What happens if my tax debt does not qualify?

Fortunately, filing bankruptcy may still be able to help you, even if your debt does not qualify for a discharge. If your tax debt is a small portion of your outstanding debts, Chapter 7 can help by eliminating most other debt. Once free of your other debts, you can devote more of your income towards paying off your tax debt.

If your tax debt is large compared to your other debts, Chapter 13 bankruptcy may be helpful. During this bankruptcy, your tax debt becomes part of the repayment plan. Under the plan, you have three to five years to pay off your debt using monthly installments. Since the payments are spread out over this time, you may find that paying your tax debt is affordable. While you are paying off your tax debt, you are protected by law from garnishment and other collection attempts by the IRS.

To learn about whether filing bankruptcy would be a sound next step, speak to an experienced bankruptcy attorney. An attorney can assess your unique situation and outline the solutions available to you.