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Can You File Bankruptcy on IRS Debt?
The Internal Revenue Service (IRS) is the U.S. federal government agency responsible for collecting taxes. Taxpayers are required to pay federal income taxes, which are determined by the amount of income earned during a tax year. The consequences for not paying taxes can be severe, including interest and penalties.
When taxpayers owe the IRS, it can be difficult to pay back the debt, especially if it is a large amount. Filing for bankruptcy may seem like a way to discharge the debt, but can you file bankruptcy on IRS debt? In this article, we will explore this question and discuss the options available to taxpayers who owe the IRS.
Can You File Bankruptcy on IRS Debt?
The short answer to this question is yes, you can file bankruptcy on IRS debt, but there are certain requirements that must be met. Under Chapter 7 bankruptcy, tax debt may be discharged if it meets the following conditions:
1. The tax debt is income tax: Only income tax can be discharged in bankruptcy. Other types of taxes, such as payroll taxes, cannot be discharged.
2. The tax debt is at least three years old: The tax debt must have been due at least three years before filing for bankruptcy.
3. The tax return was filed at least two years ago: The taxpayer must have filed the tax return for the debt at least two years before filing for bankruptcy.
4. The tax assessment is at least 240 days old: The IRS must have assessed the tax debt at least 240 days before filing for bankruptcy.
If the tax debt meets all of these conditions, then it may be dischargeable under Chapter 7 bankruptcy. However, it is important to note that some tax debts may not be dischargeable, such as those related to fraudulent tax returns or deliberate tax evasion.
Options for Taxpayers with IRS Debt
If bankruptcy is not an option or does not meet the conditions for discharge, there are other options available to taxpayers with IRS debt.
1. Installment agreement: Taxpayers can set up an installment agreement with the IRS to pay back the debt over time. The IRS may also agree to a reduced payment plan if the taxpayer has a financial hardship.
2. Offer in compromise: An offer in compromise is a settlement agreement with the IRS that allows the taxpayer to pay less than the full amount owed. This option is only available if the taxpayer cannot pay the full amount and it is not feasible to set up an installment agreement.
3. Currently not collectible: If the taxpayer is facing financial hardship and cannot pay the debt, the IRS may temporarily suspend collection actions. However, interest and penalties will continue to accrue during this time.
FAQs
Q: Can I file bankruptcy on all types of taxes?
A: No, only income tax can be discharged in bankruptcy. Other types of taxes, such as payroll taxes, cannot be discharged.
Q: How do I know if I qualify for an installment agreement or offer in compromise?
A: The IRS has specific criteria for each option, and the taxpayer must apply to be considered. It is best to consult with a tax professional to determine the best option for your situation.
Q: What if the IRS is already garnishing my wages or bank account?
A: Filing for bankruptcy may stop a wage garnishment or bank account levy. However, it is important to speak with a bankruptcy attorney to understand the specific consequences of filing for bankruptcy.
Conclusion
Tax debt can be a significant burden for taxpayers, but there are options available to manage the debt. Filing for bankruptcy may discharge certain types of tax debt, but it is important to meet the specific requirements. Taxpayers can also explore other options such as installment agreements and offers in compromise. It is crucial to seek professional advice to determine the best option for your unique circumstances.
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Article Summary:
Yes, taxpayers can file bankruptcy on IRS debt, but certain requirements must be met. For example, only income tax can be discharged, and the debt must have been due at least three years prior to filing for bankruptcy. Taxpayers can also explore other options like setting up an installment agreement or an offer in compromise if bankruptcy doesn’t meet their specific circumstances. Taxpayers should consult with a tax professional to determine the best option for them.
