What are my options to get rid of tax debt?
The Internal Revenue Service (IRS) encourages taxpayers to consider either a payment plan or offer in compromise before looking into bankruptcy. A payment plan is what it sounds like. The taxpayer would enter into an agreement with the federal agency to repay their tax debt by paying smaller portions of the overall bill over an extended period of time.
An offer in compromise is a bit more nuanced. For this option, the taxpayer makes an offer of payment to the IRS. This offer is less than the amount they owe the IRS but is the most that the taxpayer could reasonably pay without putting themselves into serious financial hardship. After completing an application, the IRS will review the applicant’s income and assets to determine if the offer is legit. If the IRS believes that this is the most the taxpayer could pay, the agency will agree to accept the payment and forgive the remaining balance.
If neither of these options work, bankruptcy could help.
Can I get rid of tax debt with bankruptcy?
There are some cases where bankruptcy is an option to get rid of, or discharge, tax debt. It is important to note that bankruptcy law does not make it as easy to discharge tax debt as other forms of debt. This is because the bankruptcy process puts creditors in a type of hierarchy. Some receive payment first; others can get what is left and others will get nothing — that last tier involves debt that is essentially fully discharged. Not surprisingly, the bankruptcy process places the IRS in one of the higher tiers.
This does not mean that you are stuck with tax debt. Some types are eligible for discharge through bankruptcy. The details will depend on which chapter of bankruptcy you choose and the reason for the tax debt. In general, income tax debt can qualify.
Other generalities when it comes to tax debt and discharge through bankruptcy include the following:
- Filed returns. The taxpayer must have filed a valid tax return for the debt in question at least two years prior to filing for bankruptcy for the tax debt to qualify. Bankruptcy law also requires the taxpayer continue to file or get an extension on the filing date for all required returns.
- No lien. If the IRS has already filed a tax lien, it is unlikely the bankruptcy courts will discharge the tax debt in question.
- No potential for criminal charges. The bankruptcy courts are unlikely to discharge tax debt if there are allegations of tax fraud or fraudulently filing out tax forms.
Other taxes, like payroll taxes, generally do not qualify for relief through bankruptcy.