If you are filing for bankruptcy, and you owe the IRS back taxes, you may be eligible to have the tax debt discharged. Many people believe that a bankruptcy filing does not absolve the tax debt owed, and the IRS does not advertise this, but many IRS taxes, penalties and accrued interest do qualify for complete discharge in bankruptcy.
For those who do qualify, there are three general rules that must be met:
Rule 1: The tax liability must be three years old or older from the "due date" of the return, including extensions.
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Rule 2: The tax returns themselves had to have been filed at least 24 months before the petition for bankruptcy date.
Rule 3: 240 days must pass from the date of assessment.
Not all people will qualify for this, and it is recommended that you seek the advice of a tax professional who can study your case and help determine if your IRS debt can be discharged. Not all bankruptcy attorneys understand whether the consumer's income tax liabilities qualify and this is where the advise of a tax expert is key. Expert representation can greatly improve your chances of having your IRS taxes, penalties and interest successfully discharged. In addition to this, Congress has enacted a new Consumer Bankruptcy law (in 2005) that included many changes. A tax expert will be up-to-date on these changes, some of which affect the ability to discharge income taxes.
Even if you do not qualify for a complete discharge of your IRS tax debt, there may be other viable options for reducing the tax obligation such as the IRS Offer in Compromise program or the IRS Installment Agreement.
The Offer in Compromise (OIC) program was established by Congress to help taxpayers get a fresh start, if they qualify. In qualifying cases, when the Offer in Compromise is accepted by the IRS, all federal tax liens can be released and the negotiated settlement amount is paid. It should be noted that the Offer in Compromise program is a privilege and is a very subjective process where the IRS has the final word. It can be a very long and complicated process too.
The IRS Installment Agreement is where the expert tax representation negotiates with the IRS a payment plan to pay back taxes. To qualify for such a plan, the consumer must have filed all tax returns, be willing to disclose assets owned including cash and bank accounts, must not have the capacity to borrow the amount owed to the IRS from other sources (a second mortgage on the home, for example), must not have adequate equity in a retirement account which can be borrowed or liquidated and must complete a personal financial statement.
For those consumers who are facing bankruptcy, or just struggling to pay off back tax debt, the IRS has provided some good options. Seeking expert tax help is the best resource for finding which one works best for a consumer's situation.
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