Other taxes, such as fraud penalties or payroll taxes, cannot be eliminated through bankruptcy. If you owe back federal taxes that you can't afford, bankruptcy may be an option. Other options include an IRS payment plan or a compromise offer. Tax debts are treated differently than other types of debts when you file for bankruptcy.
In most cases, taxes are not deducted in the event of bankruptcy, but there are some exceptions, such as fraud, errors, or excessive hardship. Income tax debts are treated differently depending on whether you file a Chapter 7 bankruptcy or a Chapter 13 case. In Chapter 13, the bankruptcy court offers you a way to pay your tax debts through the Chapter 13 payment plan. In addition, if you can show that paying your taxes would create undue hardship, you may also be able to cancel your tax debt.
You'll also want to evaluate any expected tax refunds to ensure that the money can be legally exempt from going to your creditors to settle the debt. A tax lien will convert the tax debt into a secured obligation that must be repaid regardless of the chapter you file, even if the tax is old and would otherwise have been canceled. While you may still have to pay a tax debt after filing for Chapter 7 bankruptcy, the tax debt contained in a Chapter 13 return will normally be settled in full over a repayment period of 3 to 5 years. If the IRS hasn't evaluated the debt in the past 240 days, the income tax debt will not be forgiven.
For additional tax information on bankruptcy, see Publication 908, Bankruptcy Tax Guide and Publication 5082, What You Should Know About Chapter 13 Bankruptcy and Late Payment Filings (PDF). Still, since these solutions only address your tax debt and don't affect other areas of your finances as much as bankruptcy does, they might be worth considering. While filing for bankruptcy before you meet the requirements to pay off your tax debt can provide immediate relief, it also creates a long-term headache. Income tax (with some restrictions) is the only type of tax debt that can be canceled in a Chapter 7 bankruptcy filing.
Impending unpaid debt can be stressful, and the IRS can be aggressive in its efforts to collect back taxes. But in general, if the taxpayer hasn't received a bill that breaks down the amount due by tax years, the IRS probably hasn't evaluated the debt. If your debts include tax debts, you may be able to cancel them, depending on the type of tax debt. First, neither taxes that you have deliberately tried to evade nor penalties for tax fraud can be exempted in the event of bankruptcy.
Your tax returns for the debt you want to cancel must have been on file for at least two years at the time you filed for bankruptcy.
