Some individuals and families simply cannot afford to pay their tax debt at all and are looking for ways to eliminate it. Depending on the type of debt you owe, bankruptcy may be able to help.
Filing for bankruptcy can significantly reduce your tax debt, but it can also cause serious harm to your credit score and history. This can make it harder to qualify for loans and credit in the future. That’s why it should almost always be your last option.
You can consult a tax attorney to determine whether filing bankruptcy on back taxes is a viable option for you. You might be asking “Does bankruptcy clear IRS debt?” The answer is: no, not usually. Bankruptcy can alleviate some of your income tax debt, but does not eliminate tax debt related to back taxes on trust funds or property.
If the IRS and collections agencies are trying to seize assets, take a cut of your paycheck, or repossess your home, then filing for bankruptcy can stop them from contacting you. Once you’re involved in a bankruptcy proceeding, these entities cannot come after you while you reorganize your financial life.
If you file Chapter 7 bankruptcy, IRS debt relief may be in your near future. In order to get this tax relief assistance, you must meet the following requirements:
- File a federal income tax return for the previous two years
- Have income tax debt that is at least three years old
- Have a notice from the IRS establishing your tax debt liability status
One of the benefits of filing Chapter 7 bankruptcy is that you can also participate in an IRS payment plan while you file. That can help you continue to reduce your tax debt as you use Chapter 7 bankruptcy to help you manage all of your debt.
However, you cannot be on an IRS installment agreement while in Chapter 13 bankruptcy. A tax attorney can help you determine which filing chapter makes the most sense for your financial situation and ability to pay back taxes through a payment plan.
You may be able to take advantage of other tax debt relief programs to reduce your debt while or before you file for bankruptcy. The IRS and many state agencies have established tax relief programs for people in certain states affected by natural disasters, such as:
- Severe weather, like storms, flooding, and tornadoes in states like Louisiana, Arkansas, Kentucky, Alabama, Tennessee, and West Virginia
- Hurricanes, including Hurricane Ida that impacted states like Connecticut, New Jersey, Pennsylvania, New York, and Mississippi
- Wildfires in states like Colorado