Contrary to popular belief, death and taxes are not equally certain. In bankruptcy, a debtor may be able to discharge certain kinds of tax liabilities under some circumstances. These liabilities include not only taxes, but also penalties on failure to pay those taxes. The rules for discharging tax debt vary according to a number of factors.
- First, the debtor must have filed a legitimate tax return for the years associated with the tax debt at least two years before filing for bankruptcy. If the debtor failed to file a tax return and the Internal Revenue Service assessed the tax debt, the debt cannot be discharged.
- Second, the tax liability must have been incurred at least three years before filing.
- Third, the IRS must generally have assessed the tax debt at least eight months before filing.
- Fourth, the debtor cannot have committed willful tax evasion or tax fraud, as demonstrated through inaccurate personal information, incomplete information, or evidence of intent to defraud.
Extensions may apply to some or all of these requirements.
Chapter 13 bankruptcy involves “reorganization” of a debtor’s debts. In some cases, the debtor’s tax debt may be discharged completely. However, non-dischargeable tax debt is generally paid off within three to five years under a court-approved repayment plan. The debt is paid back with no interest or late fees.
There are also methods in both Chapter 7 and Chapter 13 bankruptcy to remove federal and state tax liens on property. A lien avoidance can be filed to strip the tax lien from the debtor’s real estate or personal property.
There are alternatives to filing for bankruptcy due to tax debt. In some cases, the IRS may be willing to enter into an installment payment agreement or accept a settlement amount for less than the amount owed. However, the installment payments with the IRS generally include high interest. A cash settlement to the IRS, or offer-in-compromise, often requires a substantial amount of cash to settle the tax debt.
If you are struggling with tax debt, it can benefit you to contact an experienced bankruptcy attorney who can help you understand all of your legal options.