Posted On April 09, 2016

Using bankruptcy to address tax debt: some factors to consider

If you are having trouble paying your taxes, you may also be having trouble paying your other bills.

Indeed, if your need for debt relief is severe, you may be considering, or have already filed, bankruptcy.

As we explained in our recent article on bankruptcy and tax debt, in certain circumstances, bankruptcy can be a good way to address tax debt.

In this post, we will summarize some of the factors that affect whether this option makes sense for your situation.

Age of the debt – At least three years must have passed since the taxes were due. In other words, you can’t use bankruptcy to resolve your new tax debt from the last couple of years.

Filing past tax returns -To use bankruptcy to address tax debt, you must have filed your returns for the three most recent tax years before the bankruptcy filing. You also have to continue to file, or get an extension, while your bankruptcy is pending. You must also pay your current taxes.

Notice of federal tax lien – It is often possible to use bankruptcy to discharge certain types of tax debt. But if the IRS has imposed federal tax lien on your property, the debt has now become secured debt. This will make it more difficult to get rid of that debt in bankruptcy.

Business taxes – Business tax debt is not dischargeable in bankruptcy. Indeed, if the debt involves unpaid payroll taxes, the Trust Fund Recovery Penalty (TFRP) can come into play. Under the TFRP, the IRS can go after various individuals considered responsible for a business’s payroll tax compliance.

In short, there are numerous factors that come into play when deciding whether bankruptcy will help address your tax debt. It makes sense to discuss your specific situation with a skilled tax attorney.