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How could bankruptcy affect my outstanding tax debts?

 Posted on November 24, 2021 in Tax Debt

Bankruptcy rarely discharges an individual's unpaid tax obligations. If you can prove an unusual financial hardship, however, the court may consider discharging certain tax debts.

As noted by Credit Karma, taxes more than three years old could have a chance of ending up discharged in limited situations. A bankruptcy trustee may review and consider those tax debts more than three years past due as of the most recent April 15 payment date.

When might the U.S. bankruptcy code discharge tax debts?

The trustee assigned to your bankruptcy case might recommend amnesty for some tax debts. To qualify, the debt must reflect amounts owed on tax returns filed at least two years before your bankruptcy. Late filings, a failure to file or audits could lengthen the time until tax debts become eligible for discharge.

Overall, the court will generally not consider pardoning tax debts associated with any years you did not file an income tax return. You may order receipts of your IRS account to provide documentation of your latest filings and taxes paid.

Could a bankruptcy petition help improve tax liabilities?

Individuals experiencing financial struggles could find that bankruptcy helps them resolve their tax issues. You could, for example, find yourself in a position to apply for an IRS payment plan. You may also have an opportunity to request a delay in the IRS initiating collection activities.

As described in the Legal Reference Guide for Revenue Officers, the bankruptcy court has the authority to determine how much tax to discharge. If you have existing liens, the court may also review any prior agreements you made to pay them.

The IRS generally holds off on pursuing unpaid debts when you file for bankruptcy and the automatic stay takes effect. The automatic stay that the court issues when you submit your petition represents an injunction requiring collectors to stop contacting you.

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