Get­ting out of tax debt is dif­fi­cult espe­cially if you decide to han­dle it by your­self. Accord­ing to experts, there are five tax debt strate­gies you can fol­low depend­ing on your finan­cial situation.


Install­ment Agreement

  1. Par­tial pay­ment install­ment agreement
  2. Offer in compromise
  3. Cur­rently not col­lectible; and
  4. Fil­ing bankruptcy

If you choose to file for bank­ruptcy, con­sult­ing a tax attor­ney will def­i­nitely work in your favor. With so many things that could go wrong in deal­ing with the IRS to resolve your tax lia­bil­i­ties, an attor­ney who is expe­ri­enced in deal­ing with dif­fer­ent tax­ing agen­cies rel­a­tive to the fil­ing of a bank­ruptcy peti­tion. A bank­ruptcy lawyer can help you decide the best form of bank­ruptcy to file, as well as give you advice on the poten­tial tax effects of dif­fer­ent actions before, dur­ing, and after the bankruptcy.

Bank­ruptcy and Tax Liabilities

When the IRS comes knock­ing to col­lect tax debts, fil­ing bank­ruptcy peti­tion will stop the IRS cold. What it means is that the IRS, like other cred­i­tors, is pro­hib­ited from enforc­ing any action against indi­vid­u­als to col­lect money. The bank­ruptcy law’s “auto­matic stay” applies even to the IRS and other state tax­ing agencies.

The ques­tion to be asked is, are IRS tax debts dis­charge­able in a bank­ruptcy? A taxpayer’s fed­eral income tax can be dis­charged in a Chap­ter 7 peti­tion if all the fol­low­ing are met:

  • Indi­vid­ual income tax only — If the tax debt is other than an indi­vid­ual income tax, such as busi­ness tax or pay­roll tax includ­ing penal­ties and inter­est, said tax can­not be elim­i­nated in a bankruptcy.
  • The debt is at least three years old — To elim­i­nate a tax debt, the income tax return must have been orig­i­nally due at least three years before bank­ruptcy was filed.
  • Tax return must have been filed two years before – a tax return must have been filed for the tax debt that is sub­ject to the dis­charge at least two years before fil­ing for bankruptcy.
  • Must sat­isfy the “240-day rule” — The income tax debt must have been assessed by the IRS at least 240 days before an indi­vid­ual file the bank­ruptcy peti­tion, or must not have been assessed yet. (This time limit may be extended if the IRS sus­pended col­lec­tion activ­ity because of an offer in com­pro­mise or a pre­vi­ous bank­ruptcy filing.)
  • Fraud or will­ful eva­sion not com­mit­ted — If an indi­vid­ual or a tax­payer filed a fraud­u­lent tax return or oth­er­wise will­fully attempted to evade pay­ing taxes, such as using a false Social Secu­rity num­ber on tax returns filed, bank­ruptcy would not be a help at all.

All of the above require­ments must be met in order for an indi­vid­ual IRS tax lia­bil­ity can be dis­charged in Chap­ter 7 fil­ing and this could get com­pli­cated. It is impor­tant that a com­pe­tent bank­ruptcy attor­ney is retained to ben­e­fit from this impor­tant pro­tec­tion from bank­ruptcy law.