Tax debt can be overwhelming to manage. Lingering debt can lead the IRS to punish you with collections, interest, penalties, liens and levies. Owing money to the IRS is never a good situation to be in, so you may be looking to bankruptcy as a way out.
But whether bankruptcy will help your tax situation depends on a variety of factors. If you do not meet the specific discharge requirements, you may need to look to other methods for tax debt relief.
Dischargeable tax debts
You may be able to wipe out tax debt if the following conditions apply:
- The debt is from income taxes.
- There is no willful evasion or fraud.
- You file a tax return for the debt at least two years prior to filing a bankruptcy petition.
- The tax return is at least three years past the original due date.
- The IRS assesses the tax debt at least 240 days before filing a bankruptcy petition.
Even if your tax debt meets these requirements, declaring bankruptcy and getting it discharged does not necessarily solve all your problems. If the IRS has a lien on your real estate property before you file for bankruptcy, the lien remains. This means you will still be on the hook for the debt.
If going through the bankruptcy process is not ideal for your situation, you may consider negotiating with the IRS. You may be able to enter an offer in compromise, delay collection activities or enter into an installment program. An offer in compromise allows you to pay a lower amount. A delay in collection efforts gives you some time to earn more money to pay back the debt. Entering an installment program lets you pay back the debt in smaller installments.
Bankruptcy can sometimes be a solution to tax debt, but only in specific situations. Otherwise, working out a deal with the IRS may be the best way to go.