What happens when the taxes you owe to the government are more than you actually have? This can be a tricky situation, and many people who find themselves owing more than they can afford require legal assistance from an IRS tax lawyer. In many situations, the debtor will still need to pay back their tax debt even after they declare bankruptcy. However, the laws of bankruptcy will sometimes allow for the debt to be discharged in certain cases.

Debtors are much more likely to have their tax debt discharged in a Chapter 7 bankruptcy rather than a Chapter 13 bankruptcy. In a Chapter 13, the tax debt and other debt gets put into a repayment plan. On the other hand, a Chapter 7 allows debtors to discharge specific types of debt, including credit card debt, medical bills, and sometimes even tax debt.

What Qualifies for Discharge?

In order to have tax debt discharged, there are a few factors that play a role: the type of tax, how old the tax debt is, if the debtor filed a tax return, and what type of bankruptcy they have declared. As we mentioned earlier, a Chapter 7 bankruptcy are dischargeable, assuming that the debtor has met all of these requirements:

  • The discharge is for the debtor’s income taxes: The discharge can only be for any income taxes that may have been received during the year. Payroll taxes and any penalties that may have been applied because of fraud cannot be discharged.
  • The debtor filed their income taxes: It’s important that the debtor has successfully filed a tax return for the last two years before they file for bankruptcy.
  • The tax liability is three years old or older: The tax debt owed needs to be from a tax return that was due at least three years before the debtor files for bankruptcy.
  • The 240-day rule ensure that the debtor is still eligible: The IRS has to have assessed the tax debt at least 240 days before the payer filed for bankruptcy. If the IRS stopped their collection activity during the negotiation, then that date might be extended.
  • There was no willful tax evasion committed: If the debtor attempted to evade their taxes willfully, then they cannot have their debts discharged. This includes attempting to change their Social Security number, their name, or the spelling of their name. Also, if they failed to pay taxes repeatedly, filed an unfinished or blank tax return, or withdrew cash from their bank with an attempt to hide it, these are considered willful tax evasion!
  • The debtor did not commit any tax fraud: Their tax return needs to contain no information that shows the debtor intended to deceive the IRS.

If there are any penalties on taxes that are dischargeable, these penalties are also eligible for discharge. Once a tax liability has been discharged, the debtor will not have to worry about paying the taxes. The IRS will also be unable to garnish money from the debtor’s bank account, nor their wages.

Federal Tax Liens

Keep in mind that, even if the tax debt is discharged under Chapter 7, the IRS may have placed a federal tax lien on the person’s property before the bankruptcy case. If this is the situation, it will still remain even after the debt has been discharged. When this happens, the debtor will need to clear the title by paying off the lien before they can sell their home.

Tax Debt That is Ineligible for Discharge

You cannot have your tax debt discharged if you have tax penalties from a debt that is ineligible to be discharged, any tax debts from unfiled tax returns, or trust fund taxes. This also applies to withholding taxes that have been withheld from an employee’s paycheck.

Do not despair, however, if you cannot get your debt discharged! Those with Chapter 7 bankruptcies can sometimes enter into some sort of an installment agreement with the IRS. Or, sometimes the IRS will accept another offer that will lead to the settlement of the debt being less than the initial amount owed.

Contact Tax Law Offices Today!

If you would like to learn more about what your tax options are when it comes to declaring bankruptcy, our team is here to help you. Contact the professionals at Tax Law Offices today! We can work with you as you understand what your tax options are and then help you seek a resolution. If you are worried about your tax penalties wiping away everything you own, it’s time to call the professionals. Tax law is quite complex, which is why we are here to assist you. Let us work with you as you work towards receiving the best possible outcome. Call us now and schedule your free consultation with our IRS tax lawyers.