Tax debt is one of the most frustrating debts a person can have. The creditors can be aggravating, but no one is quite as merciless as the IRS. The IRS has the power to shut down your business, seize assets, garnish wages and even withhold Social Security benefits. Until you pay your taxes, the IRS will continue to come after you.

In the majority of cases, tax debt is not dischargeable. But, there are times when you can wipe your tax debt clean, so it’s worth speaking with a bankruptcy attorney in New York. It all depends on your situation, how old the tax debt is and other factors. Even if you can’t erase all your tax debt, bankruptcy might still help.

Chapter 7 Bankruptcy and Tax Debt

If you need to discharge tax debt, Chapter 7 is likely the better option because it’s a faster process and you won’t need to pay back the debts. Chapter 13 bankruptcy is a repayment plan. However, Chapter 7 bankruptcy is not available to everyone. You must be eligible for this type of bankruptcy, and your tax debt must qualify to be wiped out.

Here are the conditions you must meet before you can eliminate tax debts:

  • The taxes are income taxes. You cannot erase payroll taxes or fraud penalties. Only federal income taxes qualify.
  • You did not commit fraud. If you filed a fraudulent tax return or willfully attempted not to pay taxes, bankruptcy won’t help.
  • The debt is at least three years old. The tax return must have been due at least three years before filing for bankruptcy.
  • You filed a tax return. You must have filed returns for the taxes at least two years ago. Most courts won’t let you discharge tax from a late return.
  • You pass the 240-day test. The IRS must have assessed the income tax debt at least 240 days before you file your bankruptcy petition.

Keep in mind that just because you meet these parameters does not mean you automatically qualify to have your tax debts eliminated. Tax debt is tricky, so it’s important to meet with a New York bankruptcy lawyer to explore your options.

Chapter 13 Bankruptcy and Tax Debt

It’s possible that Chapter 13 bankruptcy might be a better way to handle your tax debt. This type of bankruptcy is a repayment plan, meaning that you can repay some or all of your debt in installments. The installments correlate with your income so that it’s possible to make the payments each month.

Here are a few things to know about Chapter 13 and why it might be the way to manage your tax debt:

  • Dischargeable taxes (those older than three years) might be forgiven without any payment depending on your disposable income.
  • Dischargeable taxes won’t incur any additional interest or penalties.
  • You can settle an IRS tax lien through Chapter 13 bankruptcy.
  • The IRS is obligated to follow the repayment plan.

Most repayment plans last three to five years. Once you have made all the payments, you will be caught up with your tax debt. 

Tax Returns and Filing Bankruptcy

We recommend being current on your tax returns when you file bankruptcy in New York. If you file Chapter 7 bankruptcy, the trustee assigned to your case will ask for the most current tax return. It doesn’t necessarily need to be a return from the last tax year, but if it’s not, you’ll need a written explanation.

Chapter 13 bankruptcy requires you to be up to date on your tax returns, but there is a little wiggle room. Your trustee will ask you to provide copies of the returns for the previous four tax years. If you don’t have a current tax return, your trustee may file a motion to give you time to provide your return.

Contact an Experienced Bankruptcy Attorney

The Law Office of William Waldner offers free bankruptcy consultations. This gives you a chance to meet with a lawyer and determine the best course of action. We are always honest and upfront with our clients, so we will let you know all of your options. You can then make an informed decision from there.

Contact our team of New York bankruptcy lawyers and find out which chapter of bankruptcy will help you discharge your tax debts!