If you’re unable to make your IRS payments on an OIC proposal or you do not qualify for one, you can try filing bankruptcy on back taxes. This is an option for some Americans who have tax debt. You may be wondering, “Does bankruptcy clear tax debt?” or “Does bankruptcy clear IRS debt?” The short answer is: no.

Filing for bankruptcy does not completely erase your tax debt. However, the process may be able to reduce the amount of debt you have. It could also stop the IRS from trying to collect payments or seize your assets while you are involved in bankruptcy filings.

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

You can file Chapter 7 bankruptcy, and IRS debt relief may be around the corner. This may be your opportunity to get tax relief assistance. However, you must meet the following requirements:

  • You can only use Chapter 7 bankruptcy for income tax debt, not tax debt related to taxes on assets, like property or trust funds.
  • You must file your taxes for the previous two years if you haven’t already done so.
  • You must have income tax debt that is at least three years old.
  • The IRS must first send you an amount-due notification before you can file for Chapter 7 bankruptcy.

While you’re in bankruptcy filings for Chapter 7, you may also still need to continue to pay your tax debt through an IRS installment plan. Other forms of bankruptcy may offer some tax debt relief, but you may not be able to be on an active IRS payment plan. 

For instance, you cannot be in an active IRS installment agreement while in Chapter 13 bankruptcy filings. People with small businesses may be able to file for Chapter 11 bankruptcy. 

You can pair bankruptcy with other tax relief programs to reduce your debt as much as possible. However, filing for bankruptcy can negatively impact your credit score and affect your ability to buy a house or car, qualify for loans, and make other important financial decisions. That means bankruptcy should be your final option, not one that you consider early on. 

Before jumping into bankruptcy filings, consider some of these possible tax debt relief alternatives:

  • States like West Virginia, Louisiana, Arkansas, Alabama, Kentucky, and Tennessee have IRS tax relief for those affected by severe weather, including storms, flooding, and tornadoes.
  • People affected by Hurricane Ida in states like Connecticut, New Jersey, and Pennsylvania may qualify for tax relief assistance.
  • People affected by wildfires in states like Colorado may qualify for tax relief assistance.

By Admin