Does Bankruptcy Clear Tax Debt?  

A bankruptcy filing will stop IRS efforts to collect back taxes that you owe, but in itself, that filing will not necessarily clear your tax debt. Under certain fact patterns and depending on how you file for bankruptcy, however, you may be able to get your tax debt discharged. 

If you owe a substantial amount of taxes and believe that bankruptcy is your only option, call Ayar Law in Farmington Hills, Michigan to consult with a tax debt attorney about other strategies for handling your tax debt. Bankruptcy is an extreme option that can affect your finances and credit rating for several years. Our tax debt lawyers can examine alternatives that will leave you in a better long-term position. 

Under what circumstances will a bankruptcy filing clear a tax debt? 

Your tax debt must meet certain threshold conditions before it can be discharged in a bankruptcy situation:

  • The back taxes must be taxes on income as opposed to capital gains or other non-income sources. 
  • There is no evidence of fraud in your tax returns, and you did not make willful efforts to evade paying the taxes you owe. 
  • At least three years have elapsed between the date of the tax debt and the bankruptcy filing date. 
  • At least two years have elapsed between the filing date of the tax returns reflecting the tax debt you owe and the bankruptcy filing date. 
  • At least 240 days have elapsed between the assessment of the tax debt by the IRS and the bankruptcy filing date.

Further, the tax debt will be discharged at the conclusion of a Chapter 7 bankruptcy filing but not after a Chapter 13 filing.  

Other than bankruptcy, what alternatives do you have to clear tax debt? 

If your tax debt is the only significant liability that you are facing and you are able to make payments on your other debt service, an offer in compromise with the IRS may be preferable to a bankruptcy filing. The difference between bankruptcy and an offer in compromise is that the latter is limited to your tax debt, whereas bankruptcy covers all of your outstanding debts. 

An offer in compromise is effectively a settlement of your tax debt with the IRS under which a portion of that debt may be forgiven as long as you make regular monthly payments against the balance. In most cases, the IRS will not settle your tax debt for less than the amount it could recover if you had filed for bankruptcy. The advantage of an offer in compromise is that it has less of an adverse effect than bankruptcy on your overall financial well-being. 

Contact Ayar Law for More Information on Strategies to Clear Your Tax Debt, Including Bankruptcy and an Offer in Compromise   

The tax debt relief attorneys at Ayar Law in Farmington Hills, Michigan offer complimentary strategic assessments for tax debt relief, including recommendations on whether bankruptcy or an offer in compromise would be a preferred strategy to manage your tax debt. Even if you owe the IRS more than $100,000, our lawyers can seek to develop a plan that keeps you out of bankruptcy and protects your finances and creditworthiness. Call us at your earliest convenience to schedule a consultation with one of our tax debt relief lawyers who can assess your options for eliminating your IRS tax debt.