Any sudden life-changing event, family emergency, medical expenses or natural disaster can shake your financial position badly by putting your taxes in the back seat while you focus on the more important matters. There can be multitude of situations leading to the piling of your taxes and you need not to feel embarrassed about it.
However, you can’t run away from IRS forever, sooner or later they will find a way to notify you with the action they intend to take against you to recover the finances that you or business owe to them. The IRS can take over your finances and assets in the form of a lien or by seizing your property and once that is done it can be highly difficult to get it back.
So, if you are struggling to pay back the IRS and can’t find any possible means to do so then filing for bankruptcy is the best option for you, as advised by the best bankruptcy lawyers of Colorado.
Criteria to Discharge Tax Debts
Filling bankruptcy can discharge most of your tax debts, but not all fall under Chapter 7 or Chapter 13 of the Bankruptcy Code, depending on how old they are as tax debts are associated with the specific tax year and tax return and some other criteria:
- The tax return of the related tax debt must be due at least three years inclusive of any extensions, before the taxpayer files for bankruptcy.
- The tax debt associated with the tax return that was filed at least two years ago before filing bankruptcy. It is important for you to know that tax debts arising from unfiled tax returns are not dischargeable under bankruptcy.
- The associated tax must be assessed by the IRS at least 240 days before the taxpayer files for bankruptcy.
- The tax return cannot be fraudulent or waggish and you cannot be guilty of any intentional move to evade taxes.
- The petitioner is needed to prove that the tax return of the previous four years has been filed with IRS before a bankruptcy can be granted. The petitioner also has to provide a copy of the most recent tax return to the bankruptcy court.
Apply these rules to the tax debt of each year to determine if that year’s unpaid balance is dischargeable through bankruptcy.
Role of Chapter 7 and Chapter 13 in Tax Debts
Chapter 7 is normally considered as a saving grace for anyone stuck in insolvency as it completely eliminates all the dischargeable tax debts. The bankruptcy court takes over your assets and liquidates them as much as needed to pay all of your debts. In the case of the insufficient assets, the remaining unpaid debt is waivered off.
While in Chapter 13, the court negotiates a full payment plan over three to five years with you to repay your debts to a possible extent. However, some of the unpaid balances can be discharged.
In both Chapter 7 and Chapter 13 bankruptcies, tax debts are considered as the ‘priority’ debts. By this, it means that they are paid first when the assets are liquidated in Chapter 7 and must be included first and paid in full under the repayment plan of Chapter 13.
IRS On Clearing Tax Debt through Bankruptcy
The tax debt can be cleared by filing bankruptcy depending upon the nature and circumstances of your situation. Many of the tax obligations may be discharged, managed or forgiven in a bankruptcy. The IRS considers the dates of your filing returns and age of the taxes and it is more likely to help you when they see that you have made an effort to pay your taxes.
The IRS makes sure that you did not attempt any unlawful means to evade payment of the tax, if found so, they will dismiss any tax forgiveness in no time through bankruptcy.
Bankruptcy can be the much-needed light at the end of the tunnel when you are struggling with the unpaid income tax debt. The bankruptcy lawyers Colorado inhabits provides with the best legal advice for filing bankruptcy to eliminate or reduce the back taxes you owe to the government.