As Benjamin Franklin noted, “[I]n this world nothing can be said to be certain, except death and taxes.” It’s good advice when you need some perspective, and when you are filing for bankruptcy. While you’re probably going to want to hire a different lawyer to work with you on the death part of the equation, we work to make sure our clients are ready to handle the tax consequences of a bankruptcy filing.
The first thing to know about bankruptcy and taxes is that most tax debt is not dischargeable. This means you cannot wipe it away by filing for bankruptcy. You will still owe most of the taxes you owed before you filed for bankruptcy after you come through the process.
The only exception to the debt-is-not-typically-dischargeable-rule that is worth noting is that it is sometimes possible to discharge income tax debt that is a few years old. If the taxes came due over three years ago, and you filed your tax returns on time, and you did not commit fraud, it might be possible to have some or all of the older income taxes you owe forgiven. You will, however, still owe any penalties the IRS imposed that are related to the debt.
If you have a lot of non-dischargeable tax debt that you are struggling to pay off, you should ask your bankruptcy attorney about negotiating a settlement or entering into an installment payment plan with the government. This obviously isn’t as helpful as having that debt forgiven, but it can help you get your finances under control so you can move forward without stressing about how you will ever pay off what you owe.
Another tax-related thing that your bankruptcy attorney should help you with is your yearly tax filing. Depending on what chapter of the bankruptcy code you file under, you may need to file a separate tax return on behalf of your “bankruptcy estate.” Your personal return will cover the stuff it usually does while all your debts and assets taken over by the bankruptcy court will be accounted for in the other filing. It is critical that this be done properly or the government can impose harsh penalties.