When debt becomes unmanageable, bankruptcy offers a financial lifeline. Upon filing for bankruptcy, a person is ordinarily able to discharge — or eliminate — debts from credit cards, medical bills and other sources.
One significant source of debt for some people is past-due tax obligations.
Many wrongly assume that tax debt cannot be discharged in bankruptcy. But in fact, under certain circumstances, a bankruptcy court can discharge tax debts.
Federal income tax debt
In some cases, past due income taxes can be discharged in Chapter 7 and Chapter 13 bankruptcy.
To be dischargeable, the tax obligation must be over three years old. The taxpayer must also have timely filed any required tax return and must pay any taxes that come due during the pendency of the law bankruptcy case.
Other forms of taxes, such as sales or property taxes, are not dischargeable in bankruptcy.
Another option available to a person facing overwhelming tax debt is called an offer in compromise. If you are able to take this option, you ask the IRS to relieve some of your tax debt in exchange for a partial tax payment. Essentially, you will pay less than the total amount of your outstanding federal tax debt, and the IRS will agree to stop trying to recover the remainder from you.
The IRS will consider your financial situation and other factors in determining whether to relieve you of past due tax obligation.
Speak with an attorney
An experienced bankruptcy attorney can review your situation and explain your options for addressing unmanageable debt, including debt from income taxes.