While most people believe tax debts cannot be discharged in bankruptcy, the reality is that some taxpayers may qualify for bankruptcy relief. As a general rule, payroll taxes, trust fund taxes, tax penalty fees, and fraudulently accumulated taxes are not dischargeable in bankruptcy. In the majority of cases, however, income taxes can be handled in bankruptcy.
Qualification Requirements
Several rules and conditions apply when determining whether a debt is eligible for bankruptcy discharge. The criteria established by the bankruptcy code determine which debts qualify. The taxes must first be associated with a current and filed tax return. Ineligible for discharge are tax debts that have not been submitted with the IRS. The IRS must have assessed the taxes at least 240 days prior to the bankruptcy petition. The debt must also be at least three years old. Lastly, the taxes cannot be deemed fraudulent or contain any attempt to evade payment.
Bankruptcy Cases
Despite the fact that tax debts can be discharged under either Chapter 7 or Chapter 13 bankruptcy, a debtor's income will determine which chapter they are eligible to register under. When feasible, Chapter 13 debtors are encouraged to repay their debts through a structured payment plan. However, if a debtor cannot afford to repay their total tax debt obligation, they may be able to have some or all of the debts discharged through Chapter 7 bankruptcy.
Other Choices
The management of tax debts outside of bankruptcy is strongly recommended. Fortunately, the IRS offers two direct resolution options for tax debts. The IRS installment plan permits taxpayers to repay their debts in a series of minor installments. This plan typically spreads out payments over a period of two to three years. The majority of taxpayers are pleasantly surprised to discover that the IRS is willing to negotiate payment plans. Those who cannot repay their tax debt in full have the option of settling their tax debt. An Offer In Compromise is a proposed settlement in which the IRS agrees to accept less than the total amount obligated. This program is difficult to obtain and is typically designated for those who are experiencing extreme financial hardship.""
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