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Bankruptcy may be the final line of the lifeboat when the debt is out of control, although several debtors do not know whether it will absolve them of obligations to the IRS. A debt owed to federal taxes is considered untouchable by many people but this is not true at all times.

Bankruptcy under special circumstances may help to get rid of some IRS back taxes, providing individuals with the desired start. Here, to reduce the IRS back taxes, one can get an attorney who can navigate such situations.

The given blog will unravel the legal intricacies of bankruptcy when tax is involved, the category of taxes that can be feasible to discharge, along establish what advantageous measures can be undertaken by debtors to become financially independent.

1. The Basics: Can IRS Tax Debt Be Discharged in Bankruptcy?

The brief answer: yes, but only within a rigid set of requirements.

Only tax debt that satisfies a series of federal standards can be discharged in bankruptcy and not all taxes or penalties associated with the taxes. In order to be deemed eligible, courts use what is called the Three-year, two-year, 240-day Rule, which we shall analyze herein below.

We must realize that every chapter of bankruptcy does not have an equal amount of relief. Actually, in most bankruptcies, the objective is to reorganize and sustain the debt and not to negate the debt completely.

2. Chapter 7 vs. Chapter 13: Which One Affects IRS Tax Debt?

Chapter 7 (Liquidation):

In a Chapter 7 case that is successful, tax debts that are deemed as qualifying may be discharged (eliminated) completely. The debtor is required to pass a means test, and some of the assets can be sold to pay creditors. Your tax debt may be on the list of forgiven debts when it satisfies the IRS requirements on discharges.

Chapter 13 (Reorganization):

This enables the debtors to consolidate their debts and establish their repayment plan of 3-5 years. Repayment of tax debts takes place according to this plan; however, penalties and interest may be forgiven or abated, and otherwise, IRS collection is stayed in the process.

Which of these is suitable will depend on how much money you earn, all of your debt, and your financial objectives. It is also highly advisable to seek legal advice.

3. The 3-2-240 Rule: Key Timeline Requirements

To discharge income tax in Chapter 7 or Chapter 13, one must have the following conditions satisfied:

3 Years:

You had at least 3 years of filing a tax return before you declared bankruptcy. This entails any extensions in the filing that the IRS may offer.

2 Years:

The tax return should have been between 2 and up years before bankruptcy. The IRS filed a substitute return in your place, then this condition is not met.

240 Days:

Either the IRS failed to assess the tax within 240 days prior to your bankruptcy filing, or it still has not assessed it.

The debt should possess all three conditions in order to be dischargeable.

When you are under IRS pressure and are overwhelmed, you should meet with a qualified tax attorney or a bankruptcy professional and discuss your situation. Bankruptcy could be a breath of fresh air you need to start over again–free of the black cloud of tax debt looming behind you.