Financial trouble can arrive from a variety of sources. Getting behind on your taxes can be especially terrifying; you definitely do not want the government as your creditor.
While tax debt can often involve complications and penalties that can make it harder to handle than ordinary consumer debt, there are ways to deal with it practically. In particular, many people believe there is no way to discharge any type of tax debt, which is not entirely true, depending on the type of tax you owe as well as some other circumstances.
You may be able to discharge your tax debt
If you owe federal income tax debt, you may be able to discharge it through a Chapter 7 or Chapter 13 bankruptcy. The IRS has a list of factors that make your income tax debt ineligible for discharge; if none of the factors apply, you have a good chance of a successful discharge.
Ineligible income taxes
The IRS does not allow you to discharge taxes it has not yet assessed, even if you know for certain you will not be able to pay them when they come due. Taxes assessed within 240 days before the date of your bankruptcy filing may also not be discharged. In addition, the return for your taxes must be due more than two years prior to your bankruptcy filing.
Chapter 7 requirements
In a Chapter 7 bankruptcy, fraudulent conduct or other attempts at tax evasion will also prevent you from discharging this debt. Likewise, filing a later return within two years prior to the bankruptcy can make that return ineligible. If the IRS filed a return on your behalf (called a substitute tax return), you will be prevented from discharging it.
Penalties and interest
If a tax debt is discharged through Chapter 13, the discharge generally includes penalties and accumulated interest. Non-dischargeable taxes, along with penalties and interest, are included as a priority debt. A Chapter 7 bankruptcy, however, may not discharge penalties and interest. If the IRS recorded a tax lien on your property, filing for bankruptcy may not help you deal with this debt, even if it meets the other criteria.