It may come as a surprise, but certain kinds of IRS debt, such as back taxes, can be discharged through bankruptcy. This can be a valuable tool for people who have gotten into financial trouble and are burdened with outstanding back taxes. However, there are lots of details to understand, and not all tax debt can be discharged through bankruptcy. Read on in today’s blog from Groce and DeArmon as we explain whether IRS debt can be discharged through bankruptcy.
What is priority tax debt?
Generally speaking, Priority Tax Debt cannot be discharged through bankruptcy. If you declare bankruptcy, you will need to pay back any Priority Tax Debt as part of your structured repayment plan. Even though it can’t be discharged, you can extend the timeframe for repaying Priority Tax Debt by as much as five years if you use a Chapter 13 Bankruptcy repayment plan.
What are some examples of priority tax debt?
- Tax debt that was accessed more recently than the timeframe for Non-Priority Tax Debt
- Property taxes assessed within the last year
- Withheld taxes, such as payroll taxes
- Employment taxes, customs duties, and excise taxes
- Tax penalties due to nondischargeable taxes
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What is non-priority tax debt?
In many cases, a substantial portion of Non-Priority Tax Debt can be discharged through bankruptcy, just like other non-priority debts like credit cards or personal loans. This means that once you have completed the bankruptcy repayment plan, the remaining Non-Priority Tax Debt will be discharged.
There are important details to understand about what kinds of tax debt qualify as Non-Priority Tax Debt. Each of the following criteria must be met:
- The tax debt is from unpaid income tax
- The tax debt is from a tax return that was due least 3 years ago
- The tax debt is from a tax return that you filed at least 2 years ago
- The IRS has not assessed your liability for the tax debt within the last 240 days
- There is no fraud or willful tax evasion associated with the tax debt
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The Bankruptcy Attorney at Groce & DeArmon, P.C., Is Here to Help
Filing for bankruptcy can be stressful, but it is a very powerful tool for getting your financial freedom back. If you are struggling with tax debt, the bankruptcy attorneys at Groce & DeArmon, P.C., can help. We have the experience you need to make the most out of the bankruptcy process, so you can keep more of your assets and get through the process as painlessly as possible. If you’d like to learn more, reach out to our team today.
