Does Bankruptcy Clear Tax Debt? | Discharge IRS Tax Debt | Burr Law (2024)

FAQs

Does Bankruptcy Clear Tax Debt? | Discharge IRS Tax Debt | Burr Law? ›

Your obligation to pay off the debt will be discharged, but not eliminated. However, the IRS will no longer be able to go after your income or bank account. However if a tax lien was filed before you filed for bankruptcy, the lien will remain on the property.

Personal Finance. Filing bankruptcy is a very effective method of eliminating tax debt. Bankruptcy is an expensive process. Chapter 7 bankruptcy can help a client discharge some unsecured debts, but Chapter 13 won't because it just arranges a repayment plan.

Not all debts are relieved at the conclusion of a bankruptcy case. Sometimes penalties are discharged but not the taxes for the late filing of a tax return. Certain taxes are not discharged, such as trust fund taxes.

The IRS ultimately determines whether you qualify for debt forgiveness. However, the agency generally considers taxpayers who meet these criteria: a total tax debt balance of $50,000 or less, and a total income below $100,000 for individuals (or $200,000 for married couples). Need to talk to a tax relief specialist?

You can receive tax refunds while in bankruptcy. However, refunds may be subject to delay or used to pay down your tax debts. If you believe your refund has been delayed or offset against your tax debts you can check on its status by going to our Where's My Refund?

The program aims to provide eligible taxpayers with options to settle their tax debts through streamlined processes, potentially reduced payment amounts, and manageable repayment plans.

Chapter 13 bankruptcy can be an excellent tool when you fall behind on your taxes because it allows you to discharge (wipe out) old income tax debt. If you have tax debt or property tax you can't discharge, you'll pay it off in Chapter 13 bankruptcy, instead.

Your Tax Refund During Chapter 7 Bankruptcy

Tax refunds can become complicated during a Chapter 7 bankruptcy. However, the bottom line is that your bankruptcy trustee will likely take a portion or all of your annual tax refund as part of the bankruptcy estate and use it to pay your creditors.

Ultimately, if you can reasonably pay the taxes you owe as a result of your business closing after discharging all or most of your other obligations (including maybe some of the taxes), then Chapter 7 may well make more sense. Otherwise, you will probably need to file a Chapter 13 bankruptcy.

How much will the IRS usually settle for? ›

How much will the IRS settle for? The IRS will often settle for what it deems you can feasibly pay. To determine this, the agency will take into account your assets (home, car, etc.), your income, your monthly expenses (rent, utilities, child care, etc.), your savings, and more.

6 years - If you don't report income that you should have reported, and it's more than 25% of the gross income shown on the return, or it's attributable to foreign financial assets and is more than $5,000, the time to assess tax is 6 years from the date you filed the return.

The IRS does have the authority to write off all or some of your tax debt and settle with you for less than you owe. This is called an offer in compromise, or OIC.

If you find that you cannot pay the full amount by the filing deadline, you should file your return and pay as much as you can by the due date. To see if you qualify for an installment payment plan, attach a Form 9465, “Installment Agreement Request,” to the front of your tax return.

The IRS garnishment will, however, be temporarily halted due to the automatic stay while your bankruptcy case is processed. When your case is over, you will still owe on your tax debt. For this reason, while Chapter 7 can offer a window of relief, it does not offer a long-term solution to the situation.

Whether or not the court discharges your debt depends on the situation. First and foremost, Chapter 13 is a repayment plan. You can expect to pay down your debts for several years. Only then may a court eliminate some of your remaining debt if you meet specific requirements.

Payment options

The IRS may be able to provide some relief such as a short-term extension to pay (paid in 120 days or less), an installment agreement, an offer in compromise, or by temporarily delaying collection by reporting your account as currently not collectible until you are able to pay.

Tax debt can be discharged by filing for protection using any of the options available under the federal bankruptcy code. These include Chapters 7 and 13 for most individuals, Chapter 12 for family farms and fishing operations, and Chapter 11, which is mostly for businesses and larger debts.

For individuals who establish a payment plan (installment agreement) online, balances over $25,000 must be paid by Direct Debit. See Long-term payment plan below for other payment options.

Emergency tax or fee relief is available from the California Department of Tax and Fee Administration (CDTFA) for taxpayers who have been directly affected by disasters declared as state of emergencies, both within California and nationally.