Can Bankruptcy Really Help You with a Tax Debt?

Bankruptcy can help you alleviate a variety of financial problems, both directly and indirectly. Many people assume that bankruptcy is just to help you get rid of credit card debt, but this is not the case at all. People opt to file for a variety of reasons, ranging from medical debt to consumer debt to foreclosure, and even tax debt.

If you are dealing with tax debt, and instead of bill collectors or banks calling you for payments regarding credit cards or your home you’re receiving letters (and threats) from the IRS, bankruptcy might be able to help.

Timing is Everything

The most important thing to know is that using bankruptcy to manage tax debt is different than using it to manage or eliminate other types of debt. There are several bankruptcy rules related to tax debt and it is imperative you work with an experienced attorney if you are filing for bankruptcy because of back taxes.

Even if your tax debt was not the final straw and something else drove you into bankruptcy, if tax debt is an issue you need guidance from someone who understands bankruptcy laws and how they relate to taxes.

What are a few of the most important things to know when it comes to bankruptcy and tax debt?

Timing is incredibly important when it comes to bankruptcy and tax debt.

In order to use bankruptcy to manage tax debt, the debt must be at least three years old or older, which is measured from the date the return was due to be filed. The money owed must also be assessed more than 240 days prior to filing for your bankruptcy.

Finally, the return must have been filed at least two years before your bankruptcy case. This means if you suddenly realize you have a huge bill due to Uncle Sam, you can’t file for bankruptcy and have that upcoming debt eliminated.

Filing a Late Return

In addition to the timing related to when a debt was due, many people also run into issues because they filed their tax returns late.

The Ninth Circuit Court ruled that if your taxes are filed so late that the IRS files a Substitute Filed Return (SFR), the taxes owed in relation to that return can never be discharged in a bankruptcy. (Other courts have ruled in favor of discharging, but only in instances when the taxpayer filed a return just a short time after the SFR.)

To read more about dealing with past due tax returns, check out this article from The Balance.

A word of advice: If you fail to file a return and make a payment by April 15th (the usual tax deadline), make sure you file by October 15th of that same year. You’ll need to request an extension and you’ll be forced to pay a late fee, but this avoids the IRS filing an SFR against you.

Dealing with Tax Debt through Bankruptcy

Tax debt can be some of the most intimidating there is to deal with. This is especially true when your situation is bleak and you know you’ll never be able to pay what you owe.

If you’d like to know more about how bankruptcy can help or you want someone to review your situation and help you assess your options, contact us at 813.254.5696 to schedule a free consultation.