Bankruptcy and IRS Tax Debt

Last updated on October 27, 2023

Tax debt can be resolved under Chapter 7 and Chapter 11 of the Bankruptcy Code. Filing for bankruptcy is often used to resolve back taxes when an individual does not have the ability to pay any amount of the debt. In order for this to happen, there are certain conditions that must be met These include:

• The unpaid taxes must be at least three years old.
• The taxpayer did not commit fraud.
• The tax return that led to the tax debt was not frivolous.
• The taxpayer is not guilty of tax evasion.
• The taxes are income taxes.
• The taxpayer filed a tax return for the debt that they wanted to be discharged at least two years before filing for bankruptcy.
• The IRS accessed the income tax at least 240-days before filing for bankruptcy.

These are the basic criteria that you must meet to get your tax debt discharged under the Bankruptcy Code. It’s important to remember that not all tax debts are dischargeable. If you did not file a tax return for the debt that you want to get discharged, you will not be approved. Therefore, it’s essential to file a tax return even if you cannot pay your tax debt.

It is also important that all tax returns filed were legitimate and there was no fraud or attempt at tax evasion in any of the returns. Even though the bankruptcy court may not review decades’ old tax returns, an IRS audit can discover fraudulent information on a tax return anytime.

Another important consideration for taxpayers is the time period lapsed since the tax debt was assessed. In order to get the tax debt discharged, the liability must have been assessed at least two years from the date of the filing of the return.

When bankruptcy petitions are made, the petitioner must present the past four years’ tax returns to the bankruptcy court. The court considers the income and expenditures of the petitioner to determine his or her financial condition.

There are priority and non-priority debts. Priority debts must be paid immediately while non-priority debts can be paid over several years. Income tax debt is typically treated as a non-priority debt in Chapter 13 bankruptcy.

If a taxpayer cannot qualify for bankruptcy, they can pursue other IRS tax debt resolution options such as Currently Not Collectible and Offer in Compromise. Before applying for any payment plan or for bankruptcy, it is important to seek legal advice.