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You have IRS debt and wonder whether you can file bankruptcy to erase the tax debt. This article is for you.

Problems with the Internal Revenue Service (IRS) can be frightening and stressful, and you may be wondering whether there is relief in an IRS bankruptcy.

IRS debt collection efforts can be extremely aggressive. Bank and property levies combined with wage garnishment can significantly reduce a person’s ability to pay living expenses and debts. Back taxes can also be challenging to deal with. 

IRS repayment plans can require large monthly payments, potentially too expensive to afford. Additionally, the amount of IRS debt may decrease very slowly because continued penalties and interest increase the amount of tax debt. If you file bankruptcy for IRS relief, can you get rid of tax debt?

What Happens to Tax Debt When You File Bankruptcy for IRS Relief?

If you file bankruptcy for IRS relief, you need to understand that your tax debt may not disappear. Most tax debt is not eligible for a discharge in bankruptcy. In other words, you may not be able to get rid of tax debt by filing bankruptcy. You need to carefully analyze the tax debt before filing bankruptcy to determine if you can file bankruptcy for IRS relief.

The good news is that some old tax debt might be dischargeable in a bankruptcy case. The tax debt must be owed for personal income taxes and meet three very specific requirements. The criteria for discharging personal income taxes in bankruptcy are:

1.  Older Tax Debt

The personal income tax debt must be for older tax debt. The taxes you owe must have become due at least three years before you file for bankruptcy relief.  You may want to consider what you are able to do with older tax debt.

2.  Filing of Tax Returns

You must file the tax returns that resulted in the tax debt at least two years before you file for bankruptcy relief. This can be challenging if you are behind on your taxes.

3.  Assessment of Tax Debt by IRS

The IRS must have assessed the tax debt at least 240 days before you filed for bankruptcy relief.

If you do not meet the above three criteria, you cannot discharge personal income taxes through a bankruptcy case. It is important to remember that certain events can impact the above time requirements, such as requesting an extension for filing a tax return or requesting an IRS payment plan. 

You may not want to file a bankruptcy case until you know for sure whether IRS debt is eligible for a discharge. You may not be able to “undo” the consequences of filing for bankruptcy once the bankruptcy case is filed. Working with an experienced bankruptcy attorney is the best way to ensure the calculations of the above time requirements for discharging IRS income tax debt are correct. 

Chapter 13 Bankruptcy and IRS bankruptcy for tax debt

If you cannot discharge personal income tax debt in Chapter 7, a Chapter 13 bankruptcy might help. Personal income tax debt that is not dischargeable in bankruptcy is considered a priority unsecured debt. The Chapter 13 plan pays these debts in full. 

An advantage of filing Chapter 13 for IRS relief is that the IRS cannot continue collection efforts for the tax debt as long as you are in Chapter 13 bankruptcy, and the tax debt is included in your bankruptcy plan. Another advantage is that your payments for the IRS debt may be much lower through your Chapter 13 plan than had you worked out a repayment plan with the IRS directly. 

When you finish your Chapter 13 plan, your IRS debt is gone. Additionally, you will also get rid of most, if not all, other unsecured debts. You might also pay off your car loan through Chapter 13 for less than you owe on your car, if you meet specific requirements. 

Chapter 13 might be the best way for you to get the IRS to leave you alone. It may be the best way to repay the tax debt without wage garnishments and levies. If you are unsure whether a Chapter 13 will eliminate tax debt, talk to a bankruptcy lawyer.

Do You Want to Get Out of Debt via an IRS bankruptcy? 

If you have debts you cannot pay, you might have several debt relief options that can get rid of debts. Bankruptcy might be one debt-relief option, but there could be an alternative to bankruptcy for debt relief, such as tax debt relief. In tax debt relief, a tax professional will handle your case for your tax debts. Although it’s not certain, possible tax relief outcomes are an offer in compromise, an installment agreement, a penalty abatement, a non-collectible, or an alternative solution.

Ascend helps consumers who want to get out of debt and stay out of debt. We offer several services that can help you deal with debt now and help you avoid getting back into debt in the future.

Post Author: Ben Tejes

Ben Tejes is a co-founder and CEO of Ascend Finance. Before Ascend, Ben held various executive roles at personal finance companies. Ben specializes in Chapter 13 Bankruptcy, Debt Settlement, Chapter 7 Bankruptcy and debt payoff methods. In his free time, Ben enjoys spending time going on adventures with his wife and three young daughters.

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