You may consider filing IRS bankruptcy for relief if you can’t pay your outstanding IRS debts and other tax debts. However, some types of debt, including income tax debts, can’t be discharged in bankruptcy. Fortunately, in certain circumstances, you may be able to eliminate your tax debts through a tax bankruptcy. Consult the information below to learn more about this possibility.

Can My Back Taxes Be Discharged?

Three rules within the United States Bankruptcy Code determine whether you can discharge your back taxes: the three-year rule, the two-year rule, and the 240-day rule. All of these requirements must be met before you can remove the debt.

The Three-Year Rule

The three-year rule mandates that you can discharge back taxes only if they became due at least three years before you filed for bankruptcy. Thus, if you filed for bankruptcy on July 20, 2016, your taxes must have become delinquent on or before July 20, 2013, for inclusion in bankruptcy.

The Two-Year Rule

The two-year rule mandates that you can discharge back taxes only if you filed the return related to these taxes at least two years before you filed for bankruptcy. This rule allows you to include taxes on returns filed up to one year late.

The 240-Day Rule

The 240-day rule mandates that you can discharge back taxes only if there was an assessment by the taxing agency at least 240 days before you filed for bankruptcy. In most cases, the assessment date is approximately when you file your income tax return. However, if the IRS audited you or you submitted an amended tax return, your tax assessment date may have changed.

The rules above apply only to income tax debt associated with a properly filed return and penalties and interest associated with income tax debt that qualifies for discharge. You cannot discharge tax debt associated with unfiled returns, income tax penalties associated with tax debt that cannot be removed, taxes withheld from an employee’s paycheck, sales tax, or payroll trust fund taxes.

Additional Considerations For Tax Bankruptcy

Certain events can alter the requirements above. For example, if you make an offer in compromise or obtain a taxpayer assistance order, there is a suspension of these periods while the event is in progress. Likewise, in certain circumstances, your back taxes won’t qualify for discharge in bankruptcy even if you meet all three of the time requirements detailed above. For example, if you are guilty of tax fraud or tax evasion, you cannot typically discharge any of the associated tax debt through bankruptcy even if you have satisfied the three-year rule, two-year rule, and 240-day rule.

The Effect of Bankruptcy Discharge on Federal Tax Liens

If the Internal Revenue Service had already filed a federal tax lien against you, the lien would not be removed automatically even if you can discharge your back taxes through bankruptcy. Even though the underlying debt has been eliminated, the lien will still exist unless you can have it released.

In many cases, the IRS will release a tax lien voluntarily after the associated debt has been discharged through Chapter 7 bankruptcy, especially if you don’t own much property that would be subject to the lien. However, if the IRS does not take this action voluntarily, you can request to have the lien released.

If the IRS believes you have enough assets to make the lien valuable, your request for release will most likely be denied. In this case, you may be able to settle the tax lien for less than the full amount you owe by making a lump sum offer to the IRS. Alternatively, you may attempt to wait for the lien to expire if you cannot negotiate a settlement and cannot afford to pay. However, you should always consult a professional before trying to wait out a tax lien.

If you filed for Chapter 13 bankruptcy, any federal tax liens might have already been included in your Chapter 13 payment plan. In such cases, the lien will likely be released once you have received your discharge.

What If My Tax Debt Cannot Be Discharged In Bankruptcy?

You have other options if you don’t meet the requirements to have your tax debts discharged through bankruptcy.

  • Waiting to file. If you cannot discharge your tax debt because you don’t meet one of the IRS’s waiting period rules, you could wait to file bankruptcy until you can satisfy all of these requirements. However, not all taxpayers can afford to wait.
  • Offer in compromise. If you cannot afford to pay the total amount you owe and can’t wait to file for bankruptcy, you can make an offer in compromise to settle the debt for less than the total balance.
  • Periodic payments. In some cases, you may be able to arrange to pay your tax debt over time in installments, which may reduce the overall financial burden.
  • Many other options may be available depending on your situation. Consult with the Enrolled Agents at Peace Of Mind Tax Help to see what your options may be.

Peace Of Mind Tax Help Bankruptcy Representation

One of your most important rights as a taxpayer is your right to have a qualified tax resolution professional, such as an Enrolled Agent (EA), represent you in front of the IRS and/or States and provide tax resolution for your tax liability. In conjunction with our tax attorney partners, we can assist you with your tax resolution needs via bankruptcy.

When you hire Peace Of Mind Tax Help to assist you with your tax relief request via bankruptcy, your case will be assigned to one of our tax attorney partners. We will jointly work on your tax resolution while advocating on your behalf and protecting your interests.

The worst thing you can do is do nothing at all. The best decision is to take the necessary first step and obtain some tax help! Peace Of Mind Tax Help is here to help you because when you’re dealing with an unbearable amount of tax debt due, bankruptcy may be your only option for tax relief.

Click on the “Get Peace Of Mind” button at the top of the page to take that first step.