Herrin Law

Does Bankruptcy Clear Tax Debt?

The short answer is — it depends. In a lot of cases, a person can get rid of their IRS debt through the bankruptcy process.

Some IRS Debt is eligible for a bankruptcy discharge. The general rule is if the IRS debt is over 3 years old, then it can be eligible to be discharged, just like your credit cards or medical bills.

There are a lot of exceptions to the general rule though.

The exception I see occur most is if the person filed their tax returns late. If the tax return was filed late, then the IRS Debt will not be discharged.

However, if you filed your tax return timely, and the debt is over 3 years old, then you can likely have it discharged.

In order to determine if the debt can be discharged, you would need to pull your tax return transcript for the years in question. The IRS provides a lot of information on tax return transcripts and a bankruptcy lawyer should be able to review those transcripts to let you know whether the IRS debt will be discharged.

Even if bankruptcy cannot help with your IRS debt, there are still a lot of options. Here are some common non-bankruptcy strategies to help you with your IRS DEBT:

  • Offer in Compromise

An offer in compromise is where you offer to pay a lower amount in full satisfaction of your tax liability. You submit your financials and a proposed offer amount. The IRS will look at your assets and your income/expenses, to determine if the offer is fair. If it is, they will accept the offer and once you make your final offer payments, your tax debt will be cleared.

It’s also worth noting that during the offer in compromise process (typically takes 6 to 18 months), the IRS will cease collection activity.

  • Installment Agreement

Often times the IRS will allow you to pay back the debt over a 72 month period (sometimes longer). If you are not eligible for an offer, an installment agreement is a great choice since it will stop the collection activities on your account.

  • CNC Status

If paying back the IRS debt will cause a severe hardship, you may be eligible to be put into “CANNOT COLLECT STATUS”.  This means, the IRS will stop trying to collect as long as you are in CNC status.

  • Abatements

If there are a lot of penalties and fees associated with your IRS Debt, you may be eligible to request an abatement to have the penalties reduced and/or removed. This is usually a great strategy for people who had a temporary issue but have since been in compliance with their filings.

For example, if for the last 3 years you have filed your tax returns timely and made all payments for those years, then you would be a good candidate to attempt to abate past penalties for older years.

Also, if for the last 4 years you were on time and made all payments but had a problem with the current tax year, then you would be a good candidate to try to abate the penalties.

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