Eliminating tax debts is not as easy as debt relief company commercials make it seem. The Internal Revenue Service (IRS) or overseeing state only discharges tax debt in special circumstances. Typically, bankruptcy does not wipe out most past due taxes.
However, bankruptcy can provide a way out of certain challenges with debt, including any back taxes.
Tax debt in Chapter 7 bankruptcy
Five factors determine whether bankruptcy can discharge your tax debt: how old the debt is, if you properly filed your tax return, the date when you filed the return, the type of owed taxes and when the IRS assessed the tax debt. Your income tax debt must be at least three years old and the IRS needs to assess your tax debt at least 240 days before you file for bankruptcy.
If your debt meets these criteria, then the IRS will likely discharge your tax debts. If not, then you will still need to pay back the tax debt and any penalties generated.
Tax debt Chapter 13 bankruptcy
In a Chapter 13 bankruptcy case, the court trustee may arrange for a partial repayment plan and if your debt meets the factors listed above, then the court will determine how much you can reasonably repay. The court will discharge the remaining debt that you cannot pay to the IRS or state tax bureau. If your case does not meet the five factors, then you must repay the past due taxes in full.
Overall, unpaid tax debt may prove to be more challenging than other debts, but bankruptcy may help discharge a portion of what you owe.