Dear Tax Talk,
Can you file bankruptcy on taxes owed? Can the amount owed to the IRS be erased if filing for bankruptcy?
Yes, bankruptcy may be of help if you owe past-due federal taxes. But first, before you go down that road, you may want to see if you can work out a payment plan with the IRS or make an offer in compromise.
The offer in compromise is where you offer a reduced amount to the IRS to settle your debt. The IRS is very helpful in assisting taxpayers who are unable to pay and will do everything it can to resolve the matter with you.
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An offer in compromise may be a legitimate option if you can't pay your full tax liability, or if doing so creates a financial hardship. The IRS considers your unique set of facts and circumstances:
- Ability to pay.
- Asset equity.
Chapter 13 is the most common type of bankruptcy for individuals. Here is what you need to know if that is where you are headed:
- All required tax returns must be filed for tax periods ending within four years of your bankruptcy filing.
- Unless you get an extension, you must continue to file all required returns during the bankruptcy.
- You should pay all current taxes as they come due during the bankruptcy.
According to the IRS, if you do not adhere to the above requirements, your case may end up being dismissed.
Thanks for the great question and all the best to you in resolving this matter.
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