Mounting tax debt can cause extraordinary emotional stress and lead to financial ruin. Bankruptcy can be an effective tool in eliminating debt, including federal and state income taxes. However, not all tax debts qualify for bankruptcy, and failure to file bankruptcy in a timely manner can cause tax debts to fall outside your bankruptcy estate.
Dischargeable tax debt
If your tax debt meets all of the criteria, then it is possible to eliminate tax debt through a Chapter 7 bankruptcy or to make payments under a Chapter 13 bankruptcy plan. The Bankruptcy Code provides the following multi-tiered rule to determine if the debt can be discharged:
- The three-year rule: Tax debt originating from a tax return that was due at least three years before the commencement of your bankruptcy case.
- The two-year rule: You had to have filed your tax return at least two years before you filed bankruptcy. IRS substitute returns do not count.
- The 240-day rule: The IRS must have assessed the taxes at least 240 days prior to you filing for bankruptcy relief.
This rule also stipulates that only income taxes are eligible for elimination, which means tax penalties and payroll taxes will not qualify for a bankruptcy discharge. Additionally, income taxes that involved fraud or willful attempts to evade paying taxes will not qualify for a bankruptcy discharge.
Eliminate or reorganize income tax debt
If your tax debt meets all of the above criteria, you can eliminate the debt by filing a Chapter 7 bankruptcy petition. Eligible income tax debt can also be included in a Chapter 13 repayment plan as an unsecured debt. You will make payments under your repayment plan in the same manner as other unsecured debtors. Usually the monthly payments to the IRS are significantly lower under a Chapter 13 plan than a payment agreement under an IRS Installment Agreement. If your tax debt is not dischargeable, then you pay it in full as a priority debt.
You may be able wipe out tax debt or pay off less than the full amount of the tax debt with the help of a skilled attorney. Don’t struggle with unnecessary debt on your own — contact an experienced Jacksonville attorney to explore your options.