November 29, 2021

The Connection Between Bankruptcy and Tax Liability

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If you owe taxes to the IRS, filing for bankruptcy protection may be one of the ways in which you could discharge that tax debt. However, it is important to remember that bankruptcy is not often a cure-all when it comes to tax debt. There are some circumstances under which you may not be able to discharge a tax debt by filing for bankruptcy. The laws surrounding tax liability can be complex and you may require the guidance and counsel of an experienced Florida tax attorney to lead you through what could very well be an intimidating process.

Understanding the Types of Bankruptcy

If you are considering filing bankruptcy to get rid of your tax debt, it is important that you understand the different types of bankruptcy. Chapter 7 bankruptcy is where you liquidate most of your assets in order to erase a majority of your debts. In a Chapter 13 bankruptcy, most of your debt including your tax debt and student loans, will become part of a repayment plan.

Much like a loan, you would repay it over a period of three to five years. It is unlikely that your tax debt will be erased in a Chapter 13 bankruptcy. However, on Chapter 7, you may be able to do so under certain circumstances. This type of bankruptcy does allow the debtor to discharge some types of dent including credit card debts, medical bills and in some cases, IRS tax debt.

Do You Qualify for Tax Debt Discharge?

Whether or not you might be able to discharge your tax debt depends on the type of taxes you owe, the age of the tax debt, if you filed a tax return and the type of bankruptcy you intend to file. In order to discharge federal tax debt, you may need to meet certain conditions including the following:

  • If you owe payroll or tax fraud penalties to the IRS, those are not debts you can discharge with a Chapter 7 bankruptcy. Most often, only federal income tax debt can be discharged in a bankruptcy.
  • You should have filed a legitimate tax return and you should have filed tax returns for at least two years before you filed for bankruptcy protection.
  • Your tax debt should be from at least three years before you filed for bankruptcy protection.
  • If you evaded taxes at any time, you don’t qualify for a tax discharge through bankruptcy. Evasive actions include changing your name or Social Security number, and failure to pay taxes or filing an incomplete or fraudulent tax return.
  • If you committed tax fraud, you will not be eligible for a tax debt discharge during bankruptcy.

Contacting an Experienced Tax Attorney

If you are unable to get a discharge through a bankruptcy, you may have other options including payment plans of an offer-in-compromise where you may be able to settle the debt for less than what you owe. If you are looking to eliminate tax debt, please contact an experienced international tax lawyer in Miami who can help you evaluate your options and present potential solutions.

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