Tax Debt and Bankruptcy

Fresh Tax helps taxpayers resolve their tax issues and get them in compliance with the IRS. 

Eliminating IRS Tax Liability with Bankruptcy 

Eliminating IRS tax debt by filing for bankruptcy is not a simple task and in many cases, the tax debt will not be eliminated in bankruptcy. It is crucial that you consult with a tax professional and seek proper guidance. In fact, at the end of a Chapter 7 bankruptcy, the debt will still accumulate interest and penalties or have to be repaid in full in a Chapter 13 bankruptcy repayment plan. 

If your tax debt qualifies for discharge and you qualify for discharge Chapter 7 bankruptcy may be the best option. 


Federal Tax Lien Are Not Eligible to Be Discharged 

If you qualify for dismissal in Chapter 7 bankruptcy your personal obligation is to pay the debt and prevent the IRS from going after your bank account or wages, however, if the IRS took action and placed a lien on your property before the bankruptcy was filed the lien will remain on the property enforced and you must pay off the tax lien in order to sell the property. 

To learn more about which liabilities can be eliminated in bankruptcy, please contact us at 866-211-4564. A tax resolution specialist will be able to assist and answer questions you have. 


When Discharging a Tax Debt is Allowed

Federal income taxes in Chapter 7 bankruptcy can be discharged (wiped out) only if all of the following conditions are true:

You did not commit willful evasion or tax fraud. If you wilfully filed an income tax return fraudulently or attempted to evade paying taxes, such as using an incorrect Social Security number on your income tax return, bankruptcy won’t help. 

The tax is income tax. Taxes other than income. For example, fraud penalties or payroll taxes can never be eliminated in bankruptcy. 

A tax return is filed. Your tax return must be filed for the tax debt you wish to discharge a minimum of two years prior to filing for bankruptcy. 

If you file a tax return late (meaning your extension has expired and the IRS filed a substitute for return (SFR) on your behalf), you did not file a “tax return” and are incapable to discharge the tax. In some courts, you may discharge a tax debt that is subject to a late return as long as you meet other criteria. 

The “240-day rule” has passed, in a case where the IRS assessed the income tax bill at least 240 days before you filed your bankruptcy petition, or the IRS is yet to asses your income tax bill. This time limit is subject to extension if the IRS suspends collection activity because an offer in compromise or bankruptcy is previously filed. 

Ready to Qualify for Tax Relief?

Are you considering or want to learn about the IRS Fresh Start Program? Speak with a tax relief expert today. Call us at (866)211-4564 or submit a simple form.