Taxpayers often believe that their tax liabilities are automatically dischargeable in bankruptcy as part of the process of eliminating all debts, including tax debts. This belief is accurate to a point.
Generally, federal income tax debts are dischargeable in bankruptcy when the tax debts are more than 3 years old and for which the tax return, if one was to be filed, was filed more than 240 days before filing the bankruptcy petition.
In addition to being able to discharge federal income tax debts in bankruptcy, filing a bankruptcy petition usually stops the IRS’s collection efforts. Therefore, bankruptcy may be an option to prevent the IRS from levying on bank accounts, wages or other property.
Bankruptcy can be used to leverage a taxpayer’s request for tax relief. So, if the tax debt is dischargeable in bankruptcy, the threat of filing bankruptcy may compel the IRS to settle the taxpayer's debt on the taxpayer's terms for perhaps “pennies on the dollar”.
There are also several disadvantages to filing bankruptcy. For example, federal tax liens may survive the bankruptcy process. Further, to the extent that the tax debt is not discharged in bankruptcy, the IRS may view the taxpayer as being in a better position to pay the IRS now that some of the other debts have been eliminated by the bankruptcy.
An experienced tax attorney can help you determine if bankruptcy is a viable option for resolving your tax debt. Call Mitchell A. Port at (310) 559-5259 to discuss resolving your tax problem.