After over 25 years of practice I’m still surprised how few people know that income taxes can be discharge in bankruptcy. Sure, it seems strange at first glance that the same U.S. government that forces us to pay taxes also gives us relief from it, but on closer inspection it makes perfect sense.
The reality is that it’s easy to get behind on taxes. If you under-withhold, or if a large taxable event like the sale of a home or business occurs, taxes can pile up and overwhelm your ability to repay them.
On the other hand, since everyone must pay taxes, the rules for those having taxes discharge in bankruptcy are strict and must be carefully adhered to lest the bankruptcy not accomplish the goal of discharging taxes.
So we have 3 main rules in addition to some minor rules:
There are other rules as well and complications that can occur in complex tax situations that require a very detailed and careful inquiry before filing a bankruptcy for taxes. Also, you still need to be insolvent to make filing for taxes worthwhile, because while taxes can be dischargeable, that doesn’t protect assets from being liquidated if they are not exempt.
A bankruptcy under the right circumstances, though, can be miraculous for your finances. It can be immensely better than an Offer-in-Compromise if you qualify. An Offer-in-Compromise is essentially an IRS procedure for a bankruptcy-like effect on your taxes, but it usually requires a large payment as the IRS is voluntarily allowing you some relief from taxes, but not until they’ve squeezed whatever juice they can from you.
If you owe significant taxes for older years, you owe it to yourself to do the free consultation with LeverLaw.