If you find yourself unable to make payments on your IRS Offer in Compromise (OIC) proposal or if you don’t qualify for an OIC, filing for bankruptcy on back taxes may be an option worth exploring. However, it’s important to understand that bankruptcy does not completely eliminate tax debt; instead, it may help reduce the amount owed and provide certain protections during the bankruptcy process.

Filing for bankruptcy, particularly Chapter 7 bankruptcy, can offer some relief for income tax debt. However, there are specific requirements you must meet, including:

DID YOU KNOW: Filing for Bankruptcy May Help Lower Tax Debt

  • Chapter 7 bankruptcy can only be used for income tax debt, not tax debt related to assets such as property or trust funds.
  • You must have filed your tax returns for the previous two years if you haven’t done so already.
  • The income tax debt must be at least three years old.
  • The IRS must have sent you an amount-due notification before you can file for Chapter 7 bankruptcy.

During the Chapter 7 bankruptcy process, you may still need to continue paying your tax debt through an IRS installment plan. Other forms of bankruptcy, such as Chapter 13 for individuals or Chapter 11 for small businesses, may also offer some tax debt relief but may affect your ability to be on an active IRS payment plan.

It’s worth noting that filing for bankruptcy can have negative consequences on your credit score and may impact your ability to make significant financial decisions, such as buying a house or car or qualifying for loans. Therefore, it’s essential to consider bankruptcy as a last resort and explore alternative options for tax debt relief before pursuing this course of action.

Before deciding to proceed with bankruptcy filings, here are some potential alternatives to consider for tax debt relief:

  1. Negotiating an installment agreement with the IRS.
  2. Requesting a temporary delay or hardship status from the IRS.
  3. Exploring the possibility of an Offer in Compromise (OIC).
  4. Seeking assistance from a tax professional or credit counseling agency for guidance on managing your tax debt.

Carefully evaluate these alternatives and determine which option best suits your specific financial situation before considering bankruptcy as a viable solution.

By Admin