Can Bankruptcy Discharge IRS Tax Debts? Understanding Your Options
Facing IRS tax debts can be a daunting challenge, leaving many individuals feeling trapped by their financial obligations. However, bankruptcy offers a potential pathway to relief for those burdened by tax debts. The possibility of discharging IRS tax debts in bankruptcy is a complex area of law governed by specific rules and conditions. Contact Los Angeles bankruptcy attorneys at Wadhwani & Shanfeld to explore the circumstances under which tax debts may be discharged through bankruptcy.
The Basics of Discharging Tax Debts in Bankruptcy
Not all tax debts are eligible for discharge in bankruptcy, but under certain conditions, bankruptcy can provide a fresh start for taxpayers struggling with overdue taxes. The key to understanding this process lies in the “3-2-240 rules,” a set of criteria that tax debts must meet to be considered dischargeable:
- The Three-Year Rule: The tax debt must be related to a tax return due at least three years before filing for bankruptcy.
- The Two-Year Rule: The tax return must have been filed at least two years before the bankruptcy filing.
- The 240-Day Rule: The IRS must have assessed the tax at least 240 days before the bankruptcy filing.
These rules apply to federal income taxes. Other types of taxes, such as payroll taxes or fraud penalties, are not dischargeable.
Chapter 7 Bankruptcy and Tax Debts
Chapter 7 bankruptcy, also known as liquidation bankruptcy, can eliminate certain unsecured debts, including qualifying IRS tax debts. If your tax debts meet the 3-2-240 criteria, Chapter 7 may offer a complete discharge of those obligations. This means you could potentially be freed from your tax debts without having to pay them off.
However, Chapter 7 has its limitations. It doesn’t provide a way to deal with tax liens. If the IRS has placed a lien on your property before you file for bankruptcy, the lien will remain even if your personal obligation to pay the debt is discharged.
Chapter 13 Bankruptcy and Tax Debts
Chapter 13 bankruptcy, known as a wage earner’s plan, doesn’t eliminate tax debts in the same way as Chapter 7. Instead, it allows you to incorporate these debts into a repayment plan, spreading the payments over a period of three to five years. This can make IRS obligations more manageable and prevent further penalties and interest from accruing during the bankruptcy process.
One of the advantages of Chapter 13 is its ability to deal with tax liens. Under certain conditions, Chapter 13 can reduce or eliminate IRS liens, offering a more comprehensive solution for dealing with tax-related financial burdens.
Non-Dischargeable Tax Debts
It’s important to note that not all tax debts are dischargeable in bankruptcy. The following are generally excluded from discharge:
– Tax debts from unfiled tax returns or returns filed late within two years of the bankruptcy filing.
– Taxes associated with willful evasion or fraud.
– Payroll taxes or other taxes you collected from someone else, such as sales taxes.
The Importance of Legal Guidance
Navigating bankruptcy law regarding tax obligations requires careful consideration and expertise. The specifics of your financial situation can significantly impact the outcome of your case. Consulting with a bankruptcy attorney who has experience dealing with tax debts is crucial. An attorney can evaluate your situation, advise you on the best course of action, and help you understand the potential outcomes of filing for bankruptcy.
Contact Wadhwani & Shanfeld
Bankruptcy offers a potential lifeline for individuals struggling with IRS tax debts. Whether through Chapter 7 or Chapter 13, certain tax obligations can be discharged or managed in a way that provides relief and a path forward. However, the rules governing the discharge of tax debts in bankruptcy are complex and subject to specific conditions. Understanding your options and the legal requirements is essential for making informed decisions about addressing tax debts through bankruptcy.
At Wadhwani & Shanfeld, we’re committed to helping our clients navigate the complexities of bankruptcy and tax obligations. If you’re facing IRS tax debts and considering bankruptcy, contact us to explore your options and take the first step toward financial recovery. Remember, you don’t have to face these challenges alone. With the right guidance and support, you can overcome your tax debts and start anew. Contact us to schedule a consultation.
Sources:
irs.gov/businesses/small-businesses-self-employed/declaring-bankruptcy
irs.gov/businesses/small-businesses-self-employed/chapter-7-bankruptcy-liquidation-under-the-bankruptcy-code
