Here’s What to Know About Bankruptcy and IRS Tax Debt

Are you more than hundreds and even thousands of dollars in tax debt? Then you may be looking for bankruptcy relief.

The IRS website states that tax debts can be excused in bankruptcy proceedings. But what if you are also facing fines, fees, and other penalties from the IRS?

If the IRS comes after you on a tax debt, they are more than likely willing to make a deal. Are you willing to make a deal? Tax debt can be a big, big problem. It can affect where you live, what career you have, and even where you can volunteer.

Here’s what you should know about bankruptcy and IRS tax debt. Read on!

Bankruptcy Is a Complex Process

Bankruptcy is a complex process. This requires a lot of planning and forethought. Filing for bankruptcy may reduce or eliminate some of your IRS tax debt. However, it is important to note that not all types of tax debt are eligible for bankruptcy.

For example, payroll taxes and any tax debt that is currently in litigation may not be eligible. Additionally, certain trusts and estates may not be eligible to be included in your bankruptcy filing.

Therefore, it is important to speak with a qualified bankruptcy attorney and a tax professional. This is to ensure the best results. You can also check out the link here to get in touch with a reliable tax relief professional and help you evaluate your tax situation!

Remember that filing for bankruptcy does not remove all your IRS debt, and further action may still be necessary. Despite filing for bankruptcy, you may still need to pay off portions of your IRS debt or pursue other types of debt relief options.

Rules on IRS Tax Debt Are More Complicated and Are Changing Constantly

Bankruptcy is a way to get out of debt, but it’s not always the best choice. Understand that when dealing with IRS tax debt, the rules are more complicated and are constantly changing.

It is important to have professional help. They will help you understand these rules that can have a large impact on your ability to successfully file for bankruptcy.

This is especially important if there is a possibility of tax debts dating back to before the filing of bankruptcy. It is important to understand the differences between Chapter 7, 11, and 13 bankruptcies and which one is best to help you reduce and restructure your taxes.

IRS Has Various Processes to Limit the Discharge of Tax Debt

Generally, if taxes were assessed or returns were filed within three years of bankruptcy, they are not able to be discharged. Taxes due at least two years earlier may qualify for discharge.

Additionally, the IRS has a number of other requirements for taxes to be discharged. This includes proving taxes were not due to willful evasion or tax fraud and that payments were made in good faith under a settlement agreement.

If tax debt remains after discharge, taxpayers may be able to restructure the debt with the IRS. This could be in the form of an installment agreement to repay the debt over time. 

Types of Tax Involved

Tax debt is an issue for many individuals during times of financial hardship. It’s important to understand the types of taxes involved when considering bankruptcy.

Federal Income Taxes

Federal income tax debt is typically not dischargeable during bankruptcy. This means that while filing for bankruptcy may help alleviate other debts, the IRS will still expect payment of any taxes owed.

Even if taxes are dischargeable, the individual must meet certain criteria. This includes timely filing of income tax returns and filing taxes for at least two years prior to the bankruptcy.

You also have to pass the bankruptcy court’s ‘honest but unfortunate’ test. This test shows that there were extenuating circumstances that resulted in unpaid taxes.

It’s also important to note that even with a bankruptcy filing, the IRS may still take collection action. This includes wage garnishment or a bank levy.

Payroll Taxes

Payroll taxes are considered trust fund taxes. This means taxes are withheld from employees’ paychecks and held in trust until paid to the IRS.

This type of debt is often secured and not dischargeable in bankruptcy. Unpaid payroll taxes can lead to significant penalties.

These penalties include the possibility of criminal and civil penalties. This type of debt should be addressed as quickly as possible to avoid these potential penalties.

Additionally, if an employer is behind on payroll taxes, it is important for the employer to contact the IRS. Establish a repayment plan to avoid future penalties.

Sales Taxes

Taxes related to excise taxes, employment taxes, and sales taxes are generally not dischargeable in bankruptcy. This means they must still be paid.

There are exceptions to this, though, depending on the specific situation or state laws. Speak with an experienced attorney before deciding whether bankruptcy is the right option.

If a taxpayer is considering filing for bankruptcy, make sure their sales taxes are up to date. This will ensure the sales taxes are dischargeable in bankruptcy.

It is also important to keep in mind that filing for bankruptcy does not make all tax debts go away. It can actually create more financial trouble in the future.

Amount of Tax Debt

The amount of tax debt can have an impact on the type of bankruptcy an individual can file for. In some cases, the IRS may allow individuals to discharge some of their tax debt in a Chapter 7 bankruptcy. In other cases, a Chapter 13 bankruptcy might be necessary.

It is also important to understand that filing for bankruptcy does not automatically erase all IRS debts.

Seeking Advice From an Attorney Is Recommended

An experienced attorney can offer guidance and advice on all of these matters. The attorney can help you understand what the creditors may require, what exemptions you may be entitled to, and how best to negotiate a repayment plan for your debt.

Knowledge of the IRS tax laws, particularly concerning dischargeable and non-dischargeable debt, is essential in ensuring that you make informed decisions during this difficult time. 

All About Bankruptcy and IRS Tax Debt

Bankruptcy is a viable option to help with IRS tax debt. However, seeking advice from a financial professional should always be your first step.

It is important to understand the pros and cons of bankruptcy and any potential impact it will have on your credit. Contact a professional for further information and guidance about bankruptcy and IRS tax debt.

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Last Updated on April 18, 2023

Usama BIN Safdar
Meet Usama Bin Safdar, a wordsmith hailing from Faisalabad, Pakistan. With over 5 years of experience under his belt, he's a master at weaving words to create content that's not only informative but also engaging. He's a deep-diver when it comes to SEO, and as the Founder of SoftwareBench, he helps businesses and individuals navigate the digital landscape with ease. Follow Usama for a journey into the world of SEO and digital marketing, where every word is crafted with precision and passion.

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