Does Bankruptcy Clear Tax Debt?

Written by Banks Editorial Team
3 min. read
Written by Banks Editorial Team
3 min. read

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Are you thinking about filing bankruptcy to eliminate unpaid tax debt? Proceed with caution before you call the toll-free number you heard on the radio advertisement or visit the company’s website claiming they can lend a helping hand. It’s not as easy as it sounds, and you’ll likely have to repay what you owe at some point. 

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Get Relief From Burdensome Tax Debt

Wondering whether bankruptcy will end all your tax problems? Get a free consultation with BBB Accredited “A+” rated Larson Tax Relief. With 15 enrolled IRS Agents on staff, they can help you with wage garnishments, tax levies & liens, stop IRS collections, resolve back taxes and more.

Can You File Bankruptcy On Taxes?

Yes, you can file bankruptcy to discharge federal income tax debt. Chapter 7 bankruptcy is the most viable option, but it’s relatively challenging to meet the qualification criteria. Furthermore, this form of bankruptcy only works for federal income tax debt – it can’t be used for other types of unpaid tax debt. 

When Tax Debt Can Be Discharged In Bankruptcy

Here are the criteria to get a tax debt discharged in bankruptcy: 

  • The tax debt to be discharged was filed and assessed by the IRS at least three years prior. 
  • The balance due cannot be associated with a fraudulently-filed tax return or willful attempt to evade taxation. 
  • The tax returns for the applicable tax debt were filed at least two years before the bankruptcy filing (or it’s been two years since the returns were filed with the IRS). 
  • The tax debt is at least 240 days old.

Can Federal Tax Liens Be Discharged In Bankruptcy?

No, federal tax liens cannot be discharged in bankruptcy. While Chapter 7 could get you out of the hot seat with the IRS and stop collection activity, the lien will stay on your property until you pay them off. This means you won’t be able to transfer your property to a loved one or sell it without coming up with the funds owed to the IRS. 

Chapter 7 Bankruptcy

As mentioned earlier, you can file to have your federal income tax debt discharged under Chapter 7 bankruptcy. Unpaid state tax debt could also be eligible for discharge, but often is not. Still, you should consult with a tax professional to learn more as the requirements vary by state. 

Chapter 11 and 13 Bankruptcy

Filing Chapter 11 for business is often referred to as a “plan of reorganization” where creditors like the IRS are paid back a portion of what they are owed over a period of up to 60 months. A portion of the balance will be paid through the repayment plan, and any unpaid amount could be forgiven by the IRS. Recent rules have been changed to include penalties and interest as a ‘priority claimant’ however, so the appeal of filing Chapter 11 and 13 on taxes has diminished in recent years.

555257eb0000ff00057f6128Loading TrustPilot
Get Relief From Burdensome Tax Debt

Wondering whether bankruptcy will end all your tax problems? Get a free consultation with BBB Accredited “A+” rated Larson Tax Relief. With 15 enrolled IRS Agents on staff, they can help you with wage garnishments, tax levies & liens, stop IRS collections, resolve back taxes and more.

Chapter 12 Bankruptcy

Chapter 12 bankruptcy is reserved for farmers and fishermen with unpaid tax debt. However, eligibility is not automatic as certain requirements must be met to move forward with filing. 

Chapter 13 Bankruptcy

Also known as a wage earners plan, Chapter 13 bankruptcy works just like Chapter 11 above, but is available to wage earners with regular income. It allows you to repay your taxes through a repayment plan that spans three to five years. But you could still be responsible for the remaining balance once the payment ends under these circumstances: 

  • You owe withholding taxes.
  • You owe back taxes and did not file an original return.
  • You owe tax debt from a fraudulent return or an attempt to evade taxation
  • The IRS could not file a claim to protect their interests due to delayed notification of the bankruptcy filing.

Filing for a Chapter 13 could be quite risky if you aren’t certain you can keep up with the monthly payments, however. The trustee of the bankruptcy could decide to convert your Chapter 13 to a Chapter 7 and liquidate all of your assets to satisfy your creditors should you be unable to make the established payments.

Filing Your Taxes After Bankruptcy

Filing bankruptcy won’t significantly impact how you file subsequent tax returns. You’ll continue preparing and filing Form 1040, but you’ll also need to add IRS Form 1041 (US Income Tax Return for Estates and Trusts) to your list. 

You’ll be responsible for Filing Form 1041 if you filed Chapter 11 bankruptcy. But if you filed Chapter 7 or Chapter 13, a third-party trustee will file the form on your behalf. 

This form is required since filing for bankruptcy means a trustee is now handling your assets used to remit debt payments.

Other Methods To Deal With Tax Debt

Dealing with unpaid tax debt can be stressful, and bankruptcy is usually used only as a last resort. There are other ways to buy time with the IRS and bankruptcy is very limited in the results it can achieve. It may be the only option if you have a large non-tax burden with other creditors, however, purely tax-driven bankruptcies almost never make sense. To explore other options for tax relief, you can hire a team of tax professionals to help you leverage options, including installment agreements or offers in compromise.

How To Get Professional Help

Before you throw in the towel and file bankruptcy, give the team of tax professionals at Larson Tax Relief a call. The BBB-accredited firm holds an A+ rating and has 18 Enrolled Agents on Staff. 

Larson Tax Relief serves individuals and businesses in all 50 states. To date, the firm has helped more than 18,000 clients get the relief they need and deserve. 

If you’d like to explore your options to resolve your unpaid tax debt, call 833-833-4151 to request a free evaluation today. 

Larson Tax Relief

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