Does Bankruptcy Clear Tax Debt? A Full Guide

What is Tax Debt?

When you forget to pay or file your taxes by your original filing due date, there is a mistake on your taxes, or the IRS wants to change your taxes, and the IRS says you owe money as a result, you’ve incurred tax debt. That balance is also subject to interest and a monthly late payment penalty.If you have tax debt and you’re worried about owing money to the IRS, you’re not alone.

The Best Resources and Solutions for Getting Out of Tax Debt

At some point, almost everyone has a bill they can’t pay. Depending on your circumstances, the IRS offers several options to resolve that debt. If you don’t make any arrangements with the IRS, the IRS can eventually force you to pay. The IRS can file a lien, levy your bank accounts, and garnish your wages. 

There are several options for people who need more time to pay like:

1. Extensions for people who need more time to pay
2. Standard or partial pay installment agreements
3. Penalty abatement – The IRS may remove penalties for late filing or payment if you can prove reasonable cause, such as a medical emergency, natural disaster or unexpected financial hardship.

Does the IRS Forgive Tax Debt?

There are also programs geared toward forgiving tax debt, which can provide much-needed relief like:

1. Offer in Compromise (OIC) program. This program allows taxpayers to settle their tax debt for less than what they owe.
2. Currently Not Collectible (CNC) status – If you’re facing extreme financial hardship, you might qualify for CNC status. This temporarily stops IRS collection efforts, including wage garnishments and bank levies, but interest and penalties continue to accrue.
3. Innocent spouse relief – If your spouse made errors, or committed fraud and you had no knowledge of it, you may be eligible for relief from liability.

These programs are only an option for people who truly cannot afford to pay, so you’ll have to meet strict eligibility criteria to qualify. Reaching out to a tax professional would be your best bet to help you determine the best option for you.

Does Bankruptcy Clear Tax Debt?

Not all tax debt is dischargeable, the IRS requirements surrounding it are stringent. Generally, the tax debt must be at least three years old, and you must have filed tax returns for those years. Usually, income tax is the only kind of tax debt that can be discharged in a Chapter 7 bankruptcy filing.  In Chapter 13 bankruptcy,  you can’t generally discharge your tax debts but instead you can repay them through the life of your Chapter 13 repayment plan, which can last three to five years.

Conclusion

Ultimately, tax debt might be debilitating, but there is relief out there and available to you. Experienced debt resolution professionals and experts such as the team at PDS can help shoulder some of that burden by thoroughly exploring all your options so you can take back control of your financial future.