Can IRS Debt Be Included in Bankruptcy?
When facing financial difficulties, many individuals turn to bankruptcy for relief. While bankruptcy can provide debtors with a fresh start by discharging certain debts, some may wonder if IRS tax debt can also be included. The answer to this question is not straightforward and depends on several factors. In this article, we will explore the possibility of including IRS debt in bankruptcy and what factors may affect whether or not it is dischargeable.
Types of Bankruptcy
Before we delve into the specifics of IRS debt and bankruptcy, it is important to understand the different types of bankruptcy. There are two primary types of bankruptcy that individuals may file: Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is sometimes referred to as a "liquidation" bankruptcy. In this type of bankruptcy, a debtor’s assets are sold to pay off their creditors. However, certain assets may be exempt from sale, such as a primary residence or personal property up to a certain value. Once the assets are liquidated, any remaining qualifying debts are discharged, meaning the debtor is no longer legally responsible for them.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is sometimes referred to as a "reorganization" bankruptcy. In this type of bankruptcy, the debtor creates a plan to repay their debts over a period of three to five years. The payment plan is based on the debtor’s income and expenses and is overseen by a bankruptcy trustee. Once the payment plan is completed, any remaining qualifying debts are discharged.
IRS Debt and Bankruptcy
Now that we have an understanding of the types of bankruptcy, let’s explore whether IRS tax debt can be included. The answer is yes, in some cases, but not all.
Dischargeable IRS Debt
In general, income tax debt may be dischargeable in Chapter 7 or Chapter 13 bankruptcy if the following criteria are met:
- The tax debt is for income taxes.
- The tax return was due at least three years before the bankruptcy filing.
- The tax return was filed at least two years before the bankruptcy filing.
- The tax assessment is at least 240 days old.
If all of these criteria are met, the tax debt may be dischargeable. However, it is important to note that any fraudulent or willful tax evasion may not be dischargeable.
Non-Dischargeable IRS Debt
Not all IRS tax debt is dischargeable. The following types of tax debt are generally not dischargeable in bankruptcy:
- Trust fund taxes, such as employee withholding taxes or FICA taxes.
- Taxes resulting from unfiled tax returns or fraudulent tax returns.
- Tax debt resulting from tax liens.
It is important to note that even if a debtor’s tax debt is deemed non-dischargeable, they may still be able to use bankruptcy to create a more manageable payment plan.
In conclusion, while IRS tax debt may be included in bankruptcy under certain circumstances, it is not always dischargeable. Whether or not a debtor’s tax debt is dischargeable will depend on several factors, such as the type of bankruptcy being filed and the specific details of the tax debt. If you are considering bankruptcy and have IRS tax debt, it is important to consult with an experienced bankruptcy attorney to understand your options and make informed decisions.
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