Bankruptcy and the IRS

When filing for bankruptcy, tax obligations get complicated. For instance, can tax obligations be forgiven or treated like other debts? If creditors accept lower payments and don’t get paid the full amount owed, do you have to pay tax on the difference? And what tax returns are due after a bankruptcy?

These questions and the many others that arise about bankruptcy and the IRS  are best left answered by a legal professional who has experience in tax matters and with the IRS. When the bankruptcy filing is made all collection actions must immediately stop. In this way, the IRS is similar to any other creditor you may have and it is subject to the automatic hold on collection actions. If they are garnishing your wages, that has to stop too.

Bankruptcy and Tax Debts

There are also other ways that the tax man is no different than other creditors and that includes the fact that some of the debts may be discharged even if they are tax debts – but that depends on a number of variables including:

• The type of tax
• How old the debt is
• Whether or not a return was filed
• If there was fraud or tax evasion involved
• The chapter of bankruptcy (7, 12, or 13 for example) filed.

In general, however if a tax is more than three years old there was no fraud in the return, and it was filed on time, the debt can be discharged. Some IRS charges, such as interest, may be discharged even if the entire tax debt is not in a bankruptcy filing.

You will likely have to pay tax on most forgiven debts, but that is dependent on certain circumstances. A bankruptcy attorney experienced in dealing with the IRS is best qualified to help you determine the best course of action for your particular legal situation.

If much of your debt is tax debt, you might want to consider an offer in compromise with the IRS. With an offer in compromise, the tax liability might be settled for far less than you owe and in the long run save money and get a better deal than in a bankruptcy.