People facing tax controversies related to unpaid income taxes may consider drastic solutions for their legal challenges. After all, the Internal Revenue Service (IRS) is notorious for aggressively pursuing tax debts.
Those worried about the possibility of wage garnishment or IRS liens against their property may look for any solution that helps them limit their losses. For some, bankruptcy may start to look like a viable solution. They know they have no way of paying everything they owe and want to avoid additional consequences if possible. Particularly in scenarios where people are multiple years in arrears because they have not filed income tax returns, the release promised by bankruptcy may seem particularly valuable.
Is it possible to eliminate past-due tax debt related to unfiled returns with a personal bankruptcy filing?
Bankruptcy only helps in limited scenarios
Many tax debts are simply not eligible for discharge in a personal bankruptcy filing. Older income tax debts are among the only tax debts that people can discharge through bankruptcy, but even that is difficult to manage.
Typically, filers can only discharge federal income tax debts that are at least three years old. They also need to have filed appropriate tax returns on time in order to be eligible for that relief in most cases. Although bankruptcy can help people eliminate other debts so that they have an easier time catching up on their taxes, a bankruptcy filing is unlikely to completely resolve the taxpayer’s federal income tax debts.
What options do taxpayers have?
Those who have failed to file tax returns generally have to correct that oversight by filing the appropriate paperwork. They can then potentially negotiate arrangements with the IRS that allow them to make affordable payments that work into their budgets.
The circumstances dictate the best options available. Reviewing the situation at length with someone familiar with federal tax statutes can help taxpayers plan the best path forward when they owe quite a bit in federal income taxes.
For those with unfiled tax returns, the risks of their financial oversights include not just penalties and interest but also the potential of prosecution in some cases. Bankruptcy can be part of that plan but is unlikely to fully resolve income tax obligations and protect an individual from prosecution or collection efforts.