Filing for bankruptcy is a last-ditch measure when you see no other way to get out of a financial hole. What happens if part of your debt is IRS Tax Debt? It depends on how you’re filing for bankruptcy and how you’ve handled your tax filings.
The two most common types of personal bankruptcy are Chapter 7 and Chapter 13.
Under Chapter 7 bankruptcy, all your debts get discharged. But you’ll have to liquidate most of your assets, including your checking and savings account and any non-exempt personal property. Once the court has approved your bankruptcy, your creditors, including the IRS tax debt under certain conditions, can’t come after you for any more payments on debts that you incurred before you filed for bankruptcy.
Under Chapter 13 bankruptcy, your debts don’t get completely discharged. Instead, you work out repayment agreements with your creditors, including the IRS tax debt. You won’t have to liquidate any of your personal property and/or your bank accounts as you would have to do under Chapter 7 bankruptcy.
The repayment agreements under Chapter 13 usually run from three to five years—and the good news is, you won’t be paying interest on the tax debt that you accrued before your bankruptcy during that time.
But there are limitations on what type of tax debt will disappear with Chapter 7 and Chapter 13 bankruptcy. Under IRS rules:
- Only income taxes qualify for discharge (under Chapter 7) or repayment plans (under Chapter 13). That means if you’re an employer who didn’t make payroll tax payments, you’re still going to owe them.)
- The taxes you owe date back at least three years from the time you filed your bankruptcy. In other words, if you file for bankruptcy in 2017, you’ll still owe any taxes (and penalties) for the three previous years.
- You filed your income taxes on time. If you filed late (without getting an extension and meeting that deadline), your tax debt isn’t eligible for bankruptcy relief.
- Your tax returns weren’t fraudulent. If the IRS can prove that you knowingly cheated on your taxes, you’re still going to owe them the full amount of taxes due.
- If you were audited and the audit results were finalized within the past 3 years (regardless of the tax year involved)
You’ll also have to keep current with filing your IRS taxes as you’re going through bankruptcy and making any tax payments you owe during this time.
IRS Tax Debt and bankruptcy are complex subjects, so you need to consult an attorney or a tax expert to ensure that you follow all the steps to get relief from taxes if you decide to take this step. We can be reached at 720-398-6088. Call us now!