If you’ve fallen behind on your taxes, can a bankruptcy help?
Many people erroneously believe that taxes can’t be discharged through bankruptcy — but that’s untrue. While there are limitations on what you can do, bankruptcy may be a viable recourse for some people.
Here are three questions you need to ask yourself before you try:
1. What years are involved in the debt?
Only old tax debt can be discharged. In order to be discharged, the debt must involve a tax return that was supposed to be filed (including any extensions) at least three years prior to your bankruptcy. In addition, you must have actually filed your taxes for that year a minimum of two years prior to your bankruptcy. You cannot file bankruptcy on tax debt from unfiled returns.
2. How much time has elapsed since you incurred the debt?
You incurred the debt the day that the Internal Revenue Service (IRS) determined that you owed it. That assessment may have occurred when you filed your tax return (if you showed a balance due but couldn’t pay) or as the result of an audit. A bankruptcy can only discharge debt that is at least 240 days past the assessment.
3. Was the debt honestly incurred?
Most tax debt comes from two sources: self-employed people who simply haven’t been able to keep up with their tax obligations, and people who made honest mistakes on their tax returns. As long as you didn’t knowingly commit tax fraud, you should eventually be able to discharge the debt through bankruptcy.
If tax debt is pressing down on you, take hope in the knowledge that there are solutions. A consultation with a bankruptcy attorney may provide them.