Solve your tax problems in Chapter 13
A common client question we hear is, “Can I discharge taxes in bankruptcy?” Like so many other law-related issues, the answer is, “It depends.”
In a Chapter 7 bankruptcy, certain taxes can be discharged. Speaking very generally, income taxes that were due more than three years ago can be discharged if the tax returns were filed as required. It is a more complicated than that but in general the analysis starts there.
The taxes that aren’t three years old or that aren’t dischargeable for any other reason are called “priority taxes.” Priority taxes, generally speaking, involve (a) income taxes for returns filed less than three years ago, (b) taxes assessed less than 240 days ago, or (c) employer payroll taxes or sales taxes regardless of how old they are.
If in the final analysis your taxes cannot be discharged in Chapter 7 bankruptcy, then you should consider Chapter 13 bankruptcy. In Chapter 13, your taxes can be restructured so that you can afford to pay them over time. Ongoing interest and penalties stop when Chapter 13 is filed. This enables most people to get out from under their IRS debt within three to five years — something that might not be possible if high interest and penalties were to continue to accrue. It also enables you to avoid IRS levies on your income and property. If a tax lien is already in place, you can file bankruptcy to prevent the IRS from renewing the tax lien when it expires.
Filing a Chapter 13 bankruptcy is almost always much less expense that hiring a CPA or tax lawyer to negotiate an Offer in Compromise. Chapter 13 is usually thousands of dollars less expensive. Your up-front costs are about the same as filing a Chapter 7 bankruptcy.
Read more details about Chapter 13 bankruptcy here.