Bankruptcy can directly and indirectly help with your back taxes

March 28, 2014

Bankruptcy can directly and indirectly help with your back taxes

Article provided by Balbus Law Firm
Visit us at http://www.balbuslaw.com

With the beginning of 2014 well behind us, tax season has come. Although this time of year will never make anyone's "top 10" list of annual events, if you are struggling with paying your income taxes, the season can be especially stressful. Many people in this situation think that bankruptcy is a total solution to their tax problems. The truth is although bankruptcy can help with some tax debt, it is not always the direct solution that people expect.

Tax debt in bankruptcy

Many people expect that bankruptcy will discharge their tax debt like other forms of debt, such as credit cards or medical debt. However, this is not always the case. Bankruptcy courts consider each tax year and return individually, when determining whether the debt is dischargeable. Under the law, the tax debt in question must meet certain standards before it may be discharged in bankruptcy:
-The tax return in question must have been filed at least two years before the bankruptcy petition is filed. Late filed returns and substitutes for returns filed by the IRS on your behalf can create problems.

-The due date for the tax return for the tax year in question must be more than three years before the date the bankruptcy petition is filed. If any extensions were granted by the IRS, three years must have passed since the extended due date. For example, if your bankruptcy petition is filed after May 2014 (assuming no extensions), you may be able to discharge tax debt arising in tax years up to 2010.

-The tax in question must have been assessed more than 240 days before the bankruptcy petition filing date.

-The return for the tax year in question must not have been fraudulent.

-You must not have willfully attempted to evade or defeat taxes.

Tax debt that meets these standards is eligible to be discharged during bankruptcy. Once discharged, you no longer have to pay the tax debt, as well as any interest or late penalties associated with it.

If, on the other hand, the tax debt does not meet these criteria, it is not dischargeable. However, filing bankruptcy may still be helpful for those in this situation. If tax debt is only a small percentage of your total debt, bankruptcy can help by discharging most or all of the other debt, making it substantially easier to pay the back taxes. If tax debt is a large percentage of your total debt, Chapter 13 bankruptcy can help, as it allows you to include the back taxes in the payment plan. Under the plan, you would make affordable monthly payments towards your tax debt over a three to five-year period.

An attorney can help

If you are struggling with tax debt, there are several possible solutions. To learn of the solutions that would fit your debt situation, contact an experienced bankruptcy attorney. An attorney can consider the particulars of your financial circumstances and recommend a solution that will put you on the road to fiscal recovery.