Any kind of overwhelming debt can weigh heavily on your mind – but when you owe back taxes to the federal government, the stress can be tremendous. The Internal Revenue Service (IRS) can be aggressive when it comes to collections.
Will filing for bankruptcy wipe out your tax debt? The short answer is, at best, a “maybe.”
Only some federal taxes can be discharged, and timing matters
In general, you have to meet certain specific requirements to wipe out federal tax debt in a bankruptcy. In general:
- Only income taxes can be considered, not payroll taxes or other forms of tax debt.
- The tax return on which the taxes are due must be at least three years prior to the bankruptcy petition.
- The return for the year (or years) in question must have been filed at least two years prior to the bankruptcy.
- The IRS must have assessed the tax debt at least 240 days before the bankruptcy was filed.
- There was no fraud or willful attempt to evade taxation.
This is sometimes referred to as the “three-year, two-year and 240-day rule” when taken together. Filing too early can mean the tax debt is not dischargeable, while filing at the right time can give you a fresh start.
It’s important to note that filing for bankruptcy can still help stop collection efforts for a while, even if the taxes cannot ultimately be discharged. In some cases, that can lead to a structured plan to repay the debt as part of a Chapter 13. Equally critical to remember, however, is that an IRS lien can survive bankruptcy, so any issues along those lines must be addressed separately. Skilled legal guidance is essential so that you can fully assess the options you have available and take a strategic approach to the situation.
