It is reasonable for many people to think that bankruptcy is not an option to resolve federal tax debt, but in certain cases, the debt may be dischargeable after certain conditions have been met. To determine eligibility, you must consider both the type of tax at issue and the age of the debt. In addition, individuals will have different concerns than businesses looking to file bankruptcy. Before considering bankruptcy as a means to settle your tax debt, you should consider a few important factors.
Consumer bankruptcy for individuals
Individuals may file for bankruptcy using several different avenues under federal bankruptcy laws. The most common are Chapter 7 and Chapter 13. The main difference between the two are that Chapter 7 allows you to discharge all of your debt, but requires you to liquidate some of your assets, whereas Chapter 13 allows you to restructure your debt into a payment plan over several years.
You may discharge income tax debt in a Chapter 7, and reorganize your tax debt in a Chapter 13 if it meets the following criteria:
- The assessment for your tax bill is 240 days older or more
- You filed the tax return for the tax debt in question at least two years ago
- The due date for that return was at least three years ago
- Your return was not fraudulent
- You are not guilty of tax evasion
Other rules may also apply, such as being current with your tax returns. Not all individual taxes are dischargeable. The bankruptcy court will make the final decision regarding what tax debt qualifies for discharge.
Bankruptcy solutions for your business
Businesses often file for bankruptcy under Chapter 11. It is important to know: business taxes are definitely not dischargeable. A workout might be arranged but they will not be discharged.
Tax issues regarding businesses tend to be more complicated than for individuals, as businesses often have obligations regarding employees, customers and other business concerns. Businesses may not discharge the following types of tax debts in bankruptcy:
- Payroll/employment taxes
- Certain tax penalties
- Sales tax
- Trust fund taxes
Businesses must meet some of the same requirements as individuals in terms of staying up to-date on tax filings. If bankruptcy is not the right option for you to settle your tax debts, you may want to consider other options, such as IRS payment plans.