Tax time is here. If you’ve been hit with a large tax bill—especially when dealing with financial difficulties in the wake of the pandemic—you might wonder whether you can file for bankruptcy to avoid paying.
As a general rule, bankruptcy won’t wipe out your most recent tax bill. However, it can relieve some of your liability, and the older the debt, the more likely that it may be discharged.
When You Can Discharge Tax Debt
Generally, Chapter 7 bankruptcy is the better choice to wipe out personal tax debt. However, it has to meet all of the following conditions:
- Your tax debt is due to income taxes. Only income tax debt can be discharged. Other types of tax debt, like payroll taxes, cannot be discharged in bankruptcy.
- There was no fraud or willful evasion. If you committed tax fraud or willful evasion (such as using a fraudulent Social Security number on your return), your debt cannot be wiped out.
- Your debt is three or more years old. Next, the debt has to be at least three years old. That means that if you’re filing for bankruptcy in 2021, your 2020 tax bill does not qualify for discharge.
- You filed a tax return for this debt. You must have filed a tax return for the debt at least two years prior to filing for bankruptcy. Check with your attorney if you filed a late return, which may disqualify you from being able to discharge the debt.
- You qualify under the 240-day rule. The IRS has to have assessed the debt at least 240 days before you file for bankruptcy.
There are further limitations on discharging income tax debt, depending on your specific circumstances. It’s important to work with an attorney to get the best outcome possible.
Consider Managing Your Debt Instead
If you don’t qualify for Chapter 7 bankruptcy—or Chapter 13 simply looks like a better option—you can use Chapter 13 to manage your tax debt instead. At worst, you’ll have three to five years to pay off your outstanding tax bill under the payment plan. However, in some cases, your tax bill might be forgiven without paying at all. You can also use Chapter 13 to help satisfy any tax liens against your property.
Working with an attorney is the best way to discover your options and all of their potential ramifications.
For assistance with your bankruptcy case, contact Dworken & Bernstein today.