Bankruptcy is a legal procedure that may help you eliminate your tax debt. This does not mean that it will solve all your IRS Problems and you should think about the effects it will have on you and your family before filing. Even though this process should probably be considered as your last resort for solving your IRS Problems, we can certainly explore the possibilities.
There are two basic types of bankruptcy: Chapter 7 (straight bankruptcy) and Chapter 11, 12, or 13 (repayment plans). Chapter 7 bankruptcy allows you to liquidate your debts. Chapter 11, 12 or 13 bankruptcy lets you have a payment plan so you can repay some debts and eliminate the remainder. So, what about tax debts?
There are five criteria that have to be met for your tax debts to be discharged. These criteria are:
o Filing due date for tax return is at least 3 years prior to filing for bankruptcy
o Tax return was filed at least 2 years prior to filing for bankruptcy
o Tax assessment is at least 240 days prior to filing for bankruptcy
o Tax return was not fraudulent
o Taxpayer was not guilty of tax evasion
It is also important to note that not all tax debts are eligible to be discharged. Taxes that result from unfilled tax returns obviously cannot be discharged.
One aspect of bankruptcy is that you must have filed your last 4 years tax returns before your case can go before the creditors’ meeting. You will be required to provide a copy of your most recent tax return to the bankruptcy court and your creditors have the right to ask for a copy of it too.
You also need to know that bankruptcy will affect you and your family for some time. It will remain on your credit report for up to 10 years. This could hinder your ability to obtain loans, establish new lines of credit, rent an apartment, or even change jobs in some cases.