Contrary to what many think, bankruptcy is not always a one-stop solution for back taxes.
With the New Year in full swing, it is once again time to prepare for the coming of the taxman. Although this time of year no doubt generates dread for anybody owing taxes, the ones in the worst position are those that are struggling to pay their taxes from years past. If you are in this situation, you may have heard bankruptcy can help. Although this is true, bankruptcy treats tax debt differently than other types.
Tax debt more difficult to discharge
When you think of bankruptcy, you may think that it immediately wipes away your outstanding debts. Although this is largely true for medical bills, credit cards and other unsecured debt, it is not always the case for taxes. Instead, the ability of the tax debt to be discharged in bankruptcy is chiefly determined by the year that it became due. In general, tax debt may be wiped away if:
• The IRS has assessed the tax debt at least 240 days before you filed bankruptcy.
• You have owed the tax debt for at least three years. If you have received any extensions on the debt from the IRS, three years must have elapsed since the new due date.
• You filed the tax return for the debt in question at least two years before filing bankruptcy. If you filed the return late, this may hamper your ability to receive a discharge.
• You did not attempt to file a fraudulent return or evade your taxes.
If your tax debt meets all of these standards, you may be eligible to receive a discharge relieving you of the obligation to pay the debt (plus interest and late fees).
However, on the other hand, if your tax debt does not meet these criteria, bankruptcy may be able to make it easier to pay it back. If you owe other debts and your tax debt is a small portion of your total debt load, filing Chapter 7 can help. By eliminating most of your other debts, Chapter 7 can allow you to devote more of your finances toward your taxes.
If your tax debt is substantial, filing Chapter 13 may make the repayment process significantly easier. In Chapter 13, your tax debt becomes part of the payment plan and is repaid in monthly installments over a three to five-year period. While you are repaying the debt, the IRS may not garnish your wages or institute other collection actions against you. After the repayment period, you are current on your taxes and free of most other types of debt.
An attorney can advise you further
Although bankruptcy may sound like a tempting solution to your tax problem, it may not always be the best way for you to proceed. Therefore, it is vital to speak to an attorney beforehand. The experienced attorneys at Miller & Miller Law, LLC can consider your situation and recommend the best way to address your tax debt.