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Taxes and Bankruptcy: What If You Need to Discharge Tax Debts?

On Behalf of | Apr 18, 2019 | Firm News |

Medical debts, student loans, and credit card debt tend to be the cause of most bankruptcies. However, in some situations you can get into debt for taxes. If you didn’t realize that you needed to pay taxes on a windfall earning or pay self-employment taxes, you could find yourself in substantial debt. Here are a few ways to resolve this debt.

Getting Rid of Tax Debt Through Bankruptcy

Traditionally, most tax debts cannot be removed through bankruptcy for much the same reason student loans cannot be resolved through bankruptcy. But some exceptions exist. If your tax debt is older than three years and you’ve already filed your tax returns, you may be able to discharge the debt. This is usually what is meant when people talk about discharging their back taxes through a bankruptcy.

The debt will need to go through the same tests as your other debt: it will have to be shown that you would have undue hardship if you attempted to pay it off. Further, it has to be only income tax debt; it cannot be any penalties or fines by a tax assessor.

You will also need to show that you did intend to pay this debt or were unaware of the debt until you filed the tax return. If you were intentionally avoiding paying your taxes while you could have paid them, it’s considered to be a fraudulent evasion.

Restructuring Your Debt Through Chapter 13 Bankruptcy

Most tax debts cannot be eliminated through bankruptcy because they have to be older debts and you have to show you’d be unable to pay them. However, you may be able to restructure them through a Chapter 13 bankruptcy.

A chapter 13 bankruptcy doesn’t wipe out your debts but instead creates a payment plan intended to get you out of debt within a certain amount of time. The IRS already offers fairly comprehensive payment plans under which you can pay your tax burden over the course of up to five years.

During your Chapter 13 bankruptcy, you can negotiate into a payment plan with the IRS, which will eventually pay off your tax debts. If you aren’t able to get it discharged through Chapter 7 bankruptcy, working with the IRS for a payment plan is often the best option.

Resolving a Tax Lien or Garnishment

After the federal government has taken action to collect upon taxes, you may not be able to discharge those tax debts. The IRS is allowed to file liens against your property for tax debt, in addition to starting the process of wage garnishment.

In general, the IRS usually isn’t quick to do either of these two options. Most people need to be seriously delinquent in their tax returns in order to end up with a lien or garnishment. This lien or garnishment is going to need to be dealt with separately from the bankruptcy.

The best option is to resolve this situation before the bankruptcy or during the process of bankruptcy. Work with an experienced financial law professional to come up with the best solution for resolving a tax lien or garnishment. Don’t put off dealing with this matter or you may have a harder time becoming financially whole later.

Your tax debts are going to play a significant role in your bankruptcy process. A bankruptcy attorney will be able to advise you regarding whether it looks like your tax debts can be discharged or whether you may want to take a different path. For more information about potentially discharging your tax debts and the benefits of bankruptcy, consult with the professionals at the Law Office of Travis Van Winkle.