If you have outstanding debts that you cannot pay, then you might need to declare bankruptcy to stop the bleeding and start fresh. This will generally result in debt forgiveness, although the creditors can still get some amount in payments from your liquidated assets. Once the process is complete, the debtor will be free from all obligations. This is a simple free pass, however, as there are some undesirable consequences, such as a huge plunge in credit rating, a bad social stigma, and the aforementioned liquidation of assets. There are some debts that are excluded from this process as well, so you may be wondering, does bankruptcy resolve tax debt?
Tax Requirements for a Chapter 7 Bankruptcy
The short answer is: it depends. Some forms of bankruptcy have a bigger effect on taxes than others. There are also certain types of taxes that cannot be wiped out with this process. For Chapter 7 bankruptcies, federal income tax debts can be discharged only if you did not evade payments or commit fraud. The debts must be at least three years past their due dates and you must have filed a tax return for those debts for a minimum of two years before filing for the bankruptcy. This debt should have undergone assessment by the IRS 240 days or more prior to the bankruptcy petition. Note that federal tax liens cannot be discharged. You will have to pay them off before you can sell the properties.
Tax Requirements for Chapter 13 Bankruptcy
If you are planning to file this type of petition, make sure that you understand all the requirements. This will only be granted if you were able to file all tax returns until four years ago. While serving the bankruptcy process, you will have to continue filing every required return. If you cannot do this, then at least get an extension. Throughout the bankruptcy case, you will be expected to pay current taxes as they get to their due date. If you do not file returns or pay the current taxes during this period, then the case could be headed for dismissal.
Options for Resolving Past-Due Federal Taxes
The IRS provides people with other options for resolving issues with federal taxes. One is getting a payment plan which allows a person to pay the amount owed within an extended period. This can be requested by those who think that they can settle everything within the new time frame. Short-term payment plans can last 120 days or less. This does not require any setup fees, but interest and penalties will accrue until the balance is fully paid. Long-term payment plans last more than 120 days, and they may be paid via direct debit, credit card, money order, or check. Interest and penalties will also accrue. Existing payment plans can be restructured or reinstated.
Another option is called “offer in compromise”. This could be a better choice for those who cannot pay their tax debts in full. The compromise agreement will allow partial payment depending on the circumstances of the debtor. Among the factors that will be studied are the individual’s income, expenses, asset equity, and ability to pay. This method requires a person to be current for all payments and filings. Those who are engaged in an open bankruptcy proceeding are not eligible. Debtors must submit their offer along with the proper forms and fees. This offer will be accepted if the amount is deemed reasonable based on current circumstances.
If you wish to resolve your tax debt, then consult a tax lawyer for a thorough study of possible solutions.