If you are in a situation when you owe back taxes and your proposals for an Installment Agreement or an Offer in Compromise have been rejected by the IRS, you may find yourself in position when the only possible solution for you would be filing bankruptcy. When all your reasonable efforts to resolve your tax liability fail, you should consider whether bankruptcy would help you to resolve your tax liability. Bankruptcy law in the US permits a debtor (a person who files a bankruptcy petition) to get a fresh financial start without old debts.

Determining whether filing a bankruptcy petition is the right thing for you, you should consider the following:

  • The type of taxes involved (income, employment, excise taxes, etc.),
  • When this tax liability incurred,
  • Whether tax returns were filed for the years with tax liability,
  • Under what chapter (Chapter 7, 11, or 13) you are eligible to file bankruptcy.

Back taxes can be discharged in bankruptcy if the following conditions are met:

  1. The tax return was due at least 3 years ago, including extensions.
  2. The tax return was actually filed at least 2 years ago.
  3. The tax was assessed within the 240 days prior to filing bankruptcy.
  4. No offer in compromise was pending or in effect in the 270 days prior to filing bankruptcy.
  5. The tax is not a trust fund tax, such as 941 employee withholding taxes.

There are two basic types of tax bankruptcy available to an average taxpayer: liquidation under Chapter 7 liquidates debts, including some or all tax debts, and reorganization under Chapter 13 which provides for a three- to five-year plan of reorganization and repayment of your debts, including partial and full payments of the tax debt through a bankruptcy trustee. Filing bankruptcy makes sense if you want to eliminate old tax debts and if other means of resolving your tax delinquency did not work.

One of the advantages of filing bankruptcy is that after filing a bankruptcy petition, an “automatic stay” applies which prevents your creditors, including the IRS, from trying to collect your debt. Enforcement of judgments or liens, seizure of property, wage garnishment, levy on bank account are not permitted until the “automatic stay” is in effect.

If you have a problem with tax delinquency or have a lot of other debts and think that filing Chapter 7, Chapter 11 or Chapter 13 bankruptcy may resolve your tax issues, contact Rotstein Law Office for your free first consultation at our office number (206) 579-8823 or by completing the interactive Contact Form.