There are several different types of bankruptcies, including a Chapter 13 (repayment plan for individuals), a Chapter 11 (repayment plan for businesses) or a Chapter 7 (liquidation).
In a Chapter 13 or a Chapter 11, the taxes are typically paid under an installment payment-type arrangement where the taxes are repaid under a bankruptcy plan. In a Chapter 7, some types of taxes are dischargeable and some are not. Generally speaking, any liability related to an unfiled tax return is never dischargeable in a Chapter 7 bankruptcy.
Tax liability related to Form 1040 tax returns that were timely filed and were due greater than three years ago may be dischargeable in a bankruptcy, but liability listed on tax returns that were due within the last three years is not dischargeable in a bankruptcy. The liability listed on late filed tax returns filed greater than two years ago may be dischargeable, but the liability listed on the late filed tax returns filed within the last two years may not be dischargeable.
Trust-type taxes, such as the Trust Fund Recovery Penalty or sole proprietorship Form 941 Trust Fund tax liability, is never dischargeable in a bankruptcy. Tax liability related to tax returns filed by the IRS on your behalf is not dischargeable in a bankruptcy. If you have unpaid tax liability along with significant non-IRS debt, then filing a bankruptcy may be right for you and you should consult with a qualified bankruptcy attorney.
However, if you are considering filing bankruptcy solely because of your IRS problems, you should reconsider that decision because other non-bankruptcy options are probably available to you. In sum, not all taxes can be dealt with by filing a bankruptcy.
If you have suffering from financial difficulties because of unpaid taxes, it’s time to discuss the issue with a qualified tax attorney. The tax lawyers at The IRS Trouble Solvers have been mitigating these issues since 1991. Contact us today for help!