Federal tax debt can be one of the most stressful financial obligations there is. The Internal Revenue Service (IRS) is notorious for its aggressive collection efforts.
The organization may place liens against real property or take action against financial accounts. In addition to collecting the base amount of unpaid taxes already due, the IRS also typically imposes significant penalties and interest on past-due tax balances. The amount that people owe can grow rapidly and can leave them struggling to figure out a sustainable budget.
When individuals have more debt than they can pay, filing for bankruptcy might seem like a viable option. The need for relief may be especially strong for those running small businesses or professional practices who may have both personal financial obligations and organizational debts to address.
Is a bankruptcy filing an effective solution for significant income tax debt?
Bankruptcy can offer some relief
Several key factors influence whether or not bankruptcy is likely to offer much relief for federal tax debt. Whether or not the person who owes taxes filed their annual IRS tax returns is a key consideration. People who have not filed their income tax returns may not be eligible to discharge any of their income tax debts.
Those who have filed their returns as required may be eligible for partial relief. It is possible to discharge older tax debts in a successful bankruptcy filing. IRS tax steps that are at least three years old may be eligible for a discharge during bankruptcy proceedings. Newer debts are likely not eligible for discharge.
In a Chapter 13 bankruptcy case, in particular, the IRS may participate in the repayment plan negotiation process. Taxpayers may be able to reach an arrangement that allows them to make their payments sustainable and stave off additional collection efforts, provided that they continue to make the mandatory monthly payments through the courts.
There are other possible solutions for substantial federal income tax debts. Some people can settle the amount that they owe, while others may be able to prove that they don’t actually have any significant income tax arrears after reviewing their records and IRS claims with a federal tax law attorney.
Discussing IRS collection efforts and other financial issues with a skilled legal team can help taxpayers explore different solutions for addressing their past-due federal income tax balances.