Bankruptcy

Bankruptcy and Your Tax Obligations: How to Handle Back Taxes and IRS Debt

If you’re struggling with mounting debt and considering filing for bankruptcy, you’re likely worried about how it will impact your tax obligations, especially any back taxes or debt owed to the Internal Revenue Service (IRS).

The relationship between bankruptcy and taxes can be complex, but understanding the key considerations can help you navigate this process effectively.

In this article, we’ll explore the interplay between bankruptcy and unpaid taxes, as well as outline strategies for addressing IRS debt during and after the bankruptcy process.

The Basics: Taxes and Bankruptcy

When it comes to bankruptcy, taxes fall into two broad categories: priority taxes and dischargeable taxes. Priority taxes are those that must be paid in full as part of the bankruptcy process, while dischargeable taxes are those that can potentially be eliminated or reduced through bankruptcy.

Priority Taxes

These taxes include any income taxes due within the three years prior to your bankruptcy filing, as well as any taxes you owe from the current tax year. These obligations must be paid in full through your bankruptcy plan, either in a lump sum or through a payment plan approved by the bankruptcy court.

Failure to pay priority taxes can result in the dismissal of your bankruptcy case, so it’s essential to be proactive in addressing these debts. If you owe back taxes from more than three years ago, those may be dischargeable, depending on the specific circumstances.

Dischargeable Taxes

Taxes that are typically dischargeable in bankruptcy include:

Income taxes from returns that were due more than three years ago
Taxes for which a return was filed more than two years ago
Taxes assessed by the IRS more than 240 days before the bankruptcy filing

However, there are a few key exceptions to this rule. Taxes related to fraudulent returns or willful attempts to evade taxes are generally not dischargeable in bankruptcy.

Additionally, certain types of taxes, such as payroll taxes and trust fund taxes (which include sales tax and employee withholding), are non-dischargeable, meaning you’ll still be responsible for paying them even after your bankruptcy is complete.

Strategies for Addressing IRS Debt in Bankruptcy

If you owe back taxes to the IRS, there are several strategies you can employ to handle this debt through the bankruptcy process:

File an Offer in Compromise: An Offer in Compromise (OIC) is an agreement between you and the IRS that settles your tax debt for less than the full amount owed. This can be a valuable option if you can demonstrate that paying the full amount would create financial hardship. Keep in mind that the IRS will thoroughly review your financial situation before approving an OIC, and the process can be complex, so it’s wise to work with a tax professional.
Request an Installment Agreement: If you can’t pay your back taxes in full, you may be able to negotiate an installment agreement with the IRS. This allows you to pay your tax debt in manageable monthly installments. The IRS is often willing to work with taxpayers who are making a good-faith effort to pay what they owe.
Claim the “Hardship” Exemption: In some cases, you may be able to claim the “hardship” exemption, which prevents the IRS from collecting on your tax debt during the bankruptcy process. This can provide temporary relief while you work to resolve your other financial obligations.
Pursue a Partial Discharge: If your tax debt is primarily from older returns, you may be able to have a portion of that debt discharged through the bankruptcy process, even if the full amount isn’t eligible for discharge.
Explore Chapter 13 Bankruptcy: If you have a mix of dischargeable and non-dischargeable taxes, Chapter 13 bankruptcy may be a better option than Chapter 7. In a Chapter 13 plan, you can pay off your priority tax debts over time while potentially discharging other eligible debts.

Navigating the Complexities

Dealing with tax obligations in the context of bankruptcy can be a complex and daunting task. It’s essential to work closely with both a bankruptcy attorney and a tax professional to ensure you’re making the best decisions for your unique financial situation.

Your bankruptcy attorney can help you understand the specific rules and exemptions that apply to your case, while a tax professional can assist in negotiating with the IRS, filing the necessary forms, and developing a comprehensive plan to address your tax obligations.

It’s also important to note that the rules and regulations surrounding bankruptcy and taxes can be subject to change, so it’s crucial to stay informed and work with experienced professionals who can provide up-to-date guidance.

Taking Control of Your Financial Future

Facing overwhelming tax debt can be a significant source of stress and anxiety, but by understanding the interplay between bankruptcy and taxes, you can take proactive steps to regain control of your financial future.

Whether you’re exploring options like an Offer in Compromise, an installment agreement, or a partial discharge, or considering the benefits of a Chapter 13 bankruptcy plan, the key is to approach the process with a clear understanding of your rights and responsibilities.

By working closely with your bankruptcy attorney and tax advisors, you can navigate the complexities of this situation and emerge from the process with a fresh start and a plan for rebuilding your financial well-being. Don’t hesitate to reach out for the support and guidance you need to make informed decisions and achieve the debt relief you deserve.

Learn More

At Blue Bee Bankruptcy, our lawyers are highly experienced in bankruptcy options. More importantly, we understand that each case we receive is unique and each client has different needs and goals. We will discuss these signs with you and decide the best route to take.

Likewise, we strive to help our clients rebuild their lives and take steps toward a better financial future through filing.

If you’re dealing with the potential of bankruptcy, give us a call. Our team will work to help you by reviewing all of the options our firm has available. We will ensure you’ll get the best possible outcome for your situation.

Get in touch today so we can start working on either halting bankruptcies or preventing them from taking place altogether!

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