In most cases, you are still liable for tax debt following bankruptcy proceedings. However, bankruptcy law allows the discharge, or elimination, of tax debt in some circumstances.
Whether you can discharge tax debt will depend on the type of tax, how old the tax debt is, if you filed a tax return, as well as other factors. Federal and state taxes may be dischargeable, but a complete determination cannot be made without looking at several factors. The list below details some of the factors. However, it is important to understand that each individual’s circumstances must be reviewed to determine if a tax liability may be discharged through bankruptcy.
Penalties on taxes that are dischargeable are also eligible for discharge. Once the discharge of tax liability is complete, you are no longer responsible for paying the taxes, and the IRS or state taxing authority may not garnish your wages and/or bank accounts.
In some cases, the IRS or state taxing authority will place a tax lien on your home or other property prior to a bankruptcy case. Even if a discharge of tax debt occurs during a bankruptcy case occurs, the lien will remain enforceable after the discharge. Therefore, you would have to pay off the lien before selling your home or property that is subject to the lien.
The following types of tax debt cannot be discharged:
If you are unable to discharge tax debt under Chapter 7, you may consider these alternatives:
By filing a Chapter 13 bankruptcy you may be able to pay your taxes over a period of 3-5 years, with the ability to stop collection efforts of the IRS or state taxing authorities, stop all new assessments of penalties once the case is filed, and still be eligible to receive funds for future years in a payment plan.
Other arrangements, such as entering into an installment agreement, or making an offer in compromise, which could result in the settlement of the tax debt for less than the amount owed is an alternative option to filing bankruptcy.
The Law Office of Brian R. Lewis is experienced in handling personal bankruptcy and business bankruptcy with both state and federal tax issues. Call us today and we can answer any questions you have.