Some people consider bankruptcy because they want to get rid of IRS tax debt. Most people are aware of the two most common types: Chapter 7 and Chapter 13. If you owe money to the IRS and are thinking about bankruptcy it is important to know whether or not your debts will be discharged. In a Chapter 7, if you qualify, taxes can be released under certain conditions. Obviously, if you do not meet the qualifications for Chapter 7, or you do not meet the IRS rules to discharge taxes, there is no reason to move forward--especially if your sole intention is to release tax liabilities.
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Five Rules or Conditions That Must Be Met to Clear IRS Tax Debt
With Chapter Seven, if the tax debt meets the following requirements it can be discharged.
1. Tax return filed. Even if you do not have enough money to pay the taxes, you must file a return with the IRS. On top of this, the return must have been filed at least two years prior to the bankruptcy proceeding for it to be discharged.
2. The tax debt must be related to a return that was due three or more years ago. For instance, if you want to file bankruptcy in 2009 the debt must come from returns in 2006 or prior.
3. The IRS must assess your tax debt at least 240 days before the bankruptcy.
4. Can all types of tax debt be discharged? No. Only income tax qualifies at this time. Other types of tax debt, such as payroll taxes, do not qualify to be discharged under any type of bankruptcy.
5. No fraudulent activity. If you have ever been convicted of tax evasion you will not be able to discharge your debt.
Along with the five details above, before your bankruptcy is approved you will have to supply the judge and involved creditors with your most recent tax return. It is also asked that you have proof that your most recent four tax returns are on file with the IRS.
With Chapter 7 bankruptcy, meeting the qualifications above usually results in a discharge of taxes owed. With Chapter 13, a distribution to creditors usually takes place first which means that a tax settlement will have to be agreed upon with the IRS. Typically, with Chapter 13, tax debts are repaid (not released) through the use of a monthly payment plan.
When Should A Chapter 7 Bankruptcy Be Considered?
Bankruptcy should be considered only if you have exhausted all other tax settlement methods (Offer In Compromise, Partial Payment Installment Agreement to name a few) and you want to discharge other non-tax related liabilities as well. The reason why it should not always be the first mechanism to pursue when you cannot pay your taxes is it is much more destructive to your credit, and it can be quite expensive if you are using an attorney. Moreover, with Chapter 7, you will usually have to liquidate or sell (non-exempt assets determined by your State) certain assets.
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