Owing taxes to the IRS or Iowa Department of Revenue can feel like the worst type of debt you could have, but in reality there are several options for dealing with tax debt. For example, discharging taxes in bankruptcy is not as difficult as people think. You just have to follow some specific rules.
Only unsecured income taxes can be discharged in bankruptcy. Tax liens and trust fund taxes like Medicare and other withholding taxes can’t be discharged (there may be a statute of limitations for these tax debts though). For income taxes to be discharged, there must have been a return filed and the return must have been “due” (including any filing extensions) at least three years prior to the bankruptcy. The return must also have been filed at least two years prior to the bankruptcy and the tax assessed at least 240 days prior to the bankruptcy. If all these requirements have been met then the taxes can be discharged in bankruptcy.
Offer in Compromise
Besides discharging taxes in bankruptcy, it might also be possible to reach an “offer in compromise” with the IRS that provides you an opportunity to settle the tax debt for less than what’s owed. You’ll need to show an inability to pay the debt in full based on your income and assets. Nancy L. Thompson Law Office P.C. can help you submit all the paperwork necessary to obtain a tax offer in compromise. Installment agreements with both the IRS and state are also possible and sometimes the installment agreement can be used until enough time has passed to discharge the taxes in bankruptcy.
Dealing with tax debt isn’t as impossible as you think. It’s important to deal with the tax debt rather than ignoring it though because both the IRS and the Department have expanded powers to collect tax debt, including offsetting tax refunds, denying licenses and placing liens on property. Contact us if you have tax debt you can’t pay.