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Do I Still Owe Income Tax if I File for Bankruptcy?

On Behalf of Veitengruber Law | Jan 14,2022

The most common kind of debt owed to the IRS is unpaid income taxes. In most cases, taxes cannot be eliminated through filing for bankruptcy. There are, however, specific instances in which income taxes can be eliminated through Chapter 7 bankruptcy. If you are getting harassed by the IRS for back taxes, filing for bankruptcy can put a stop to it. Here is what you need to know.

Bankruptcy and the Automatic Stay

If you owe unpaid taxes to the IRS, they will begin sending letters, legal notices, and eventually make attempts to collect on the debts, either by seizing a bank account, filing a lien, or even garnishing your wages. When you file for bankruptcy, an automatic stay goes into effect and they are not able to take any of those actions. It doesn’t matter what stage of collection the IRS is in at the time; the automatic stay prevents them from contacting you or trying to collect on the debts. You, however, are allowed to contact them. This allows you or your legal team to take charge of the negotiating throughout your bankruptcy case.

The IRS Rules for Bankruptcy Discharge

There are specific rules pertaining to discharging tax debt. Chapter 7 is able to discharge income tax debt. Almost all other kinds of taxes will not be discharged. You also must meet the following requirements:

1.   You filed your tax returns for the previous two years if you were required to file.

2.  The income tax debt must be at least three years old. It is very important that if you are filing bankruptcy to discharge back taxes that you file AT LEAST three years after the tax day of the debt you are seeking to get rid of.

3.   Your tax assessment can’t be more than eight months old. It can be tricky to know when your taxes have been assessed. A bankruptcy attorney can help you work with the IRS to figure this out.

What About New Income Tax Debt After I File?

After you file for bankruptcy, you are still required to file your tax returns like normal. Because this new debt will not fall under the requirements above, it will not be included in your bankruptcy case. If you anticipate accruing new tax debt that you will not be able to discharge, you have a few options:

1.   Make installment payments. The IRS just wants their money. Once you make an effort to prove you intend to pay them, their harassment will typically subside. If you have the money to do it, making payments in installments can be a way to pay back the debt slowly.

2.   Join the Offer in Compromise Program. While very few people qualify for this program, it is a possible way for you to get rid of your debt. Essentially, you offer to pay what you can and the IRS waives the rest of your debts. A word of caution: the IRS can force you to sell any assets to pay what you can.

3.   Utilize the Automatic Stay. While you will not be able to discharge new tax debts, you can take advantage of the automatic stay to get the funds needed to pay your new income tax debts.

George Veitengruber from Veitengruber Law is an experienced bankruptcy attorney. He can help you determine if your income tax debt can be eliminated in bankruptcy and how to pay back debts that cannot be discharged.


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