Roughly 11 million Americans owe back taxes amounting to about $114 billion. Falling behind on your taxes is extremely stressful, but bankruptcy can help.
Unfortunately, bankruptcy cannot help with all of your tax liability.
Filing bankruptcy will at least stop tax garnishments for the duration of your automatic stay. Keep in mind that you must still file your income tax returns, even while you are in the middle of the bankruptcy process.
In addition, it’s important to realize that while back income tax debt can be discharged, withholding owed for Social Security and Medicare cannot. You must also have filed valid tax returns for at least two years before filing for bankruptcy, and the tax returns must be submitted on time (granted extensions still count as an on-time filing if you met the extension deadline). The IRS must also have assessed the debt for at least 240 days before the bankruptcy filing.
If the IRS has already placed a lien on your property, filing bankruptcy cannot lift the lien.
Tax Debt in Chapter 7
Old income tax debt, that is, debt that’s older than three years ago, may be discharged like any other bankruptcy debt. However, if you’ve filed extensions those extensions are taken into account when evaluating the age of your debt.
The rest of the debt will remain your responsibility after the discharge.
Tax Debt in Chapter 13
As with Chapter 7 bankruptcies, tax debt that is three years old or older may be discharged during a Chapter 13. The rest of your tax debt may be folded into your Chapter 13 payment plan.
During this time, they cannot garnish your wages, take you to court, or put liens on your property.
Getting Tax Debt Under Control
Bankruptcy won’t fix the entire problem if you’ve got some lingering issue with your taxes that needs to be addressed. Once you’ve filed for bankruptcy you should reassess how you’ve been handling your taxes.
Are you struggling to file on time? Are you a freelancer who is struggling to make quarterly payments?
Whatever it is, you need to make some adjustments to ensure that tax debt doesn’t rear its head again. Ideally, you won’t owe the IRS anything, and the IRS won’t owe you anything at the end of each calendar year.
We usually recommend our clients hire an accountant after the bankruptcy case is done. Accountants can more than pay for themselves by saving you from massive tax bills.
Get Help Today
If your finances are out of control, our office can help. Contact us to schedule a free appointment today.