Is Bankruptcy an Option for Tax Debt

Not surprisingly, like with many aspects of bankruptcy, there is often misinformation or worst case scenarios taken as absolute fact when it comes to tax debt.

Some people might mistakenly think from information they’ve heard that tax debt is never dischargeable. Not true.

Others may think it’s no different than your credit card debt and can be discharged easily. Not necessarily true.

The one thing you need to know is that bankruptcy can definitely help with tax debt. Sometimes, if the right circumstances are met, it can be discharged just like any other debt. Other times you may have to take certain actions or wait a certain period of time.

And in some cases it won’t be dischargeable at the moment, if ever, but bankruptcy can help manage the debt and eliminate penalties and interest.

If you are dealing with tax debt and you’re receiving letters from the IRS, filing for bankruptcy could help you deal with the problem.

Here’s how:

Filing for Bankruptcy Does Not Result in the Automatic Discharge of a Tax Debt

Many types of debts can be eliminated through bankruptcy. Unfortunately, tax debt has some unique requirements.

The rules that govern bankruptcy and tax debt are complicated, so it’s important to work with an experienced professional if you decide to file.

However, the most important thing to understand before you commit to bankruptcy is that timing is important when dealing with taxes and bankruptcy.

For instance, there are ways to directly use bankruptcy to help you deal with tax debt. If you owe back taxes that are three years or more past due, you might be able to use bankruptcy to help you eliminate the debt entirely.

Many of the rules regarding bankruptcy and tax debt are in place to prevent people from filing for bankruptcy as soon as their big tax bill comes due. Instead, bankruptcy can be used to alleviate some of the burden of an old tax debt that has been haunting you. You should not expect to use bankruptcy to get immediately out of a new tax bill, but you can use it to deal with old debt.

You can also use bankruptcy to free up money you’re paying toward other debts so you can use it for tax debt. You’ll be able to deal with your tax debt issue indirectly by making your overall financial circumstances better.

Filing Your Return

It’s also important to realize that when you file your tax return affects whether or not bankruptcy will be an option for helping you with tax debt.

The general rule is that you can discharge income taxes if:

1. The tax is more than three years old,
2. You filed the return at least two years before filing the bankruptcy
3. The tax must have been assessed by the IRS at least 240 days before you filed the bankruptcy petition or not assessed at all
4. You did not file a fraudulent return

The trick is when someone files a late return. If the tax was more than three years old, but no return was ever filed, then you cannot receive a discharge. The other complication is whether a late filed return is actually a “return”, specifically if the IRS already filed a substitute return.

According to the Ninth Circuit Court, if your taxes are filed late enough to trigger the IRS to file a Substitute Filed Return (SFR), whatever is owed on that return can never be discharged in a bankruptcy. (Other courts have ruled in favor of discharge, but not after long lapses in filing.)

Essentially, filing on time is essential, even if you won’t be able to pay the bill.

To learn more about tax returns, check out this article from The Balance.

Keep in mind that even if you’ve filed late, you still have an opportunity to file by October 15th every year. If you miss the April deadline, commit to filing in October instead of blowing off your obligation.

Tax Debt and Bankruptcy

Tax debt can be intimidating, especially when the IRS comes calling. It’s even worse when you owe a great deal of money and the debt has been hanging over your head for some time.

The good news is that there’s a good chance you can discharge older income taxes. If not, bankruptcy can still help your overall financial situation to help you address this tax debt.

To learn more about how bankruptcy can help or to discuss your tax debt problems with an expert that can assess your situation, contact the law office of Frank J. LaPerch, PC at 845.942.5500.

Frank LaPerch

Admitted: New York and New Jersey State Bar; U.S. District Court, Southern District of New York.

Experience: Frank J. LaPerch graduated from the Quinnipiac University School of Law in 1998. During law school, he interned for the Rockland County District Attorney’s Office. Upon admission, Frank focused his private practice in the following areas: Bankruptcy, Family Law, Real Estate and Criminal Law.

Frank is an active member of the Family and Criminal Law Assigned Counsel program of the Rockland County Bar Association. He has also taught several paralegal courses for the Washington Online Legal Institute (WOLI). Frank is also a former Acting Justice for the Village of Suffern in Rockland County, New York. In his judicial capacity, he has presided over misdemeanor criminal matters, vehicle and traffic cases, felony arraignments, small claims and civil cases.

Education: Quinnipiac School of Law, J.D. 1998; Marist College, B.A. 1995.