What are some basic facts about discharging tax debt?

 Posted on December 06, 2019 in Tax Debt

The intimidating power of the IRS can make it seem there is no way to escape the burden of mounting tax debt even with bankruptcy. However, that is not the case. It is possible to successfully discharge some tax debt by going through bankruptcy in Maryland, though it is more likely under some circumstances than others. Understanding these circumstances may be beneficial as you contemplate a possible bankruptcy.

Per FindLaw, if you are going to discharge tax debt, you are more likely to do it under Chapter 7 bankruptcy than Chapter 13. The reason is that Chapter 13 is focused primarily on repaying your debts, including tax debts you may have. Since Chapter 7 involves liquidating the assets of a person to pay off debts without a long term repayment plan, there is more latitude to discharge debts. While some tax debt cannot be discharged, it is possible to discharge some debt under Chapter 7.

Some people who cannot pay their taxes incur penalties from the IRS. To collect back taxes you owe, the IRS may seek to garnish your wages. The good news is that if unpaid taxes are discharged, the penalties are discharged along with them. This means once a bankruptcy is completed, the IRS cannot follow through with garnishment measures intended to collect on unpaid taxes.

However, there are some taxes and penalties that are not eligible for discharge. Bankruptcy will not excuse you from paying payroll taxes or trust fund taxes. Also, bankruptcy cannot be used to discharge penalties incurred for committing tax fraud. Your discharge request may also be denied if the tax liability is more than three years old or if you had committed intentional fraud on a tax return.

Bankruptcy filers burdened with tax debt will have varying needs. For this reason, only read this article as general information and not as a substitute for the advice of a professional attorney.