For some taxpayers who are unable to pay the IRS, filing for bankruptcy may be a viable option. Like the Offer in Compromise program, declaring bankruptcy can decrease your federal tax debt amount. However, not all bankruptcy chapters provide back taxes help, as they generally do not erase all of your debt.
Filing for bankruptcy can offer some relief for taxpayers, as it can temporarily stop the IRS from contacting you and seizing your assets. If you’re in the middle of a bankruptcy proceeding, the government cannot try to collect unpaid taxes.
Declaring Chapter 7 bankruptcy offers an opportunity to lower your unpaid income taxes. Through this form of bankruptcy, a person’s assets and valuable items are sold through liquidation. The proceeds are used to pay the person’s creditors, which in this case could be the IRS.
Tax debt forgiveness depends on personal circumstances. A tax debt lawyer may be able to give you more information about discharging – or removing – your financial responsibility.
However, the following restrictions generally apply:
- The court can only discharge income tax debt through Chapter 7, and it may not cover property or trust fund taxes
- You must file taxes for the past two years
- Your income debt may need to be three or more years old
- You must wait until the IRS assesses the debt and sends you an amount-due notification
Even during the bankruptcy process, you still need to file your required tax return or request an extension. The court could potentially dismiss your bankruptcy case if you do not file a federal tax return.
Some considerations for filing taxes after declaring bankruptcy include the following:
- Chapter 7 bankruptcy – File your taxes as you do typically, usually Form 1040. The trustee files Form 1041 for your bankruptcy estate.
- Chapter 11 bankruptcy – File both 1040 and 1041 forms
Any tax refund or return payment prior to filing for bankruptcy becomes part of your bankruptcy estate. However, you may receive refunds issued after your bankruptcy filing date, depending on the amount and any applicable laws. In some cases, your tax refund or return payment goes toward paying your creditors.
However, there are consequences of filing for bankruptcy. For example, your credit score will likely take a hit. It can also make certain financial transactions more difficult, like getting a loan or buying a home. Declaring bankruptcy is usually your last option.
Before impairing your credit by filing for bankruptcy, check out a few tax relief alternatives. For instance, the IRS offers tax relief provisions if you were a victim of a disaster situation, including:
- Severe storms, tornadoes, and flooding for victims in Arkansas, Alabama, Kentucky, Tennessee, Louisiana, and West Virginia.
- Hurricane Ida for victims in Connecticut, Mississippi, New York, New Jersey, and Pennsylvania.
- Wildfires for victims in Colorado.
Usually, the IRS accepts payment plans and may forgive some of your tax debt if you are unable to pay all of it. An Offer in Compromise could help erase some of your unpaid taxes without impacting your credit score.
You may be able to avoid tax debt by verifying your filing and owed amount. In some cases, you need to pay your taxes quarterly to avoid late fees. Find out more about filing your taxes next.
By Admin –