When would bankruptcy be an effective option?

Sometimes bankruptcy can be very effective way to resolve a serious tax problem and stop IRS collection activity. The filing of a bankruptcy case automatically and instantly stops the IRS from levying bank accounts and pay-checks, and enables the taxpayer to either obtain a discharge (through a Chapter 7) or reorganize his or her tax obligation (through Chapters 11 or 13).

Knowing that your taxes can be discharged is helpful even if you don’t decide to file.  If you are in an Offer in Compromise, you can leverage your offer with the IRS, informing them that the taxes can be discharged in bankruptcy.  In that scenario,  the IRS may find your offer more attractive — if you go bankrupt, they may not be able to collect anything.

When are taxes eligible for discharge in a bankruptcy?

A thorough analysis of your IRS tax records (account transcripts) will show when and if these taxes are eligible for discharge. You need to know if a substitute for return was filed by the IRS (these taxes are most likely not eligible for discharge) and if the taxes are old enough to be discharged.  Timing is extremely important as it will determine whether your taxes will be discharged.  For example, it must be three years from the due date of your return for the tax year you want to discharge. If you filed an extension, then the three years starts from the extension date. If you filed late, it must be two years from the date you filed.

The tax assessment must be at least 240 days old and this is suspended by the filing of an Offer in Compromise.  The tax cannot be related to trust fund taxes, such as payroll or sales tax.  Any elements of tax fraud will also hinder a successful discharge of outstanding tax obligations.

If you are thinking of filing a tax motivated bankruptcy or just want to determine if your taxes are eligible for discharge, it is important that you hire a competent tax professional to review your transcripts to see if you will obtain any relief in bankruptcy from your taxes.   Call 1.800.777.3800 or contact TaxFirm.com.

Frequently Asked Questions

Can I file for Bankruptcy protection?

If you qualify, your interest and penalties on you back taxes can be wiped out by filing bankruptcy. Unfortunately, not everyone qualifies to erase their tax debt in bankruptcy. You must meet certain requirements. If you file bankruptcy and don’t meet the requirements, the IRS will still be breathing down your neck, to collect back taxes and penalties, after your bankruptcy is over. Taxfirm.com can help you determine if Bankruptcy is right for you. Call 1-800-777-3800 for a free consultation today!


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