Tax Debt Sticks Around Even After Bankruptcy

There are certain kinds of debt that you can’t get rid of, even by filing for bankruptcy. The money you owe someone because of a lawsuit, student loan debt, and delinquent child support payments are some examples. Filing for bankruptcy won’t wipe it out like it does other kinds of debt. 

Tax debt is another type of debt that typically cannot be discharged through bankruptcy. However, there are other things you can do to reduce the amount of tax debt you owe if you are struggling to pay it back. The attorneys at Hanson & Payne regularly assist Milwaukee area businesses and families take control of their tax debts. 

Income Tax Debt 

We said tax debt cannot typically be discharged through bankruptcy because there is one type of tax debt that you may be able to get wiped out. The Internal Revenue Service (IRS) will allow a bankruptcy court to discharge or wipe out old income tax debt if the following conditions are met:

  • You must have filed your tax returns.  Income tax debt is not dischargeable if you did not file a tax return in the years the debt you would like forgiven is from. 
  • The debt is at least three years old. Income tax debts will not be forgiven if the debt is less than three years old. The IRS generally expects newer debt to be paid off. 
  • The 240-day rule. The IRS must have assessed the tax — notified you of it, and officially noted it in its records — at least 240 days before you filed for bankruptcy.  
  • You aren’t trying to cheat the system. If you tried some sort of tax evasion scheme, the government is not going to forgive your debts in bankruptcy court. 
  • Keep paying your taxes. Be sure to file your tax returns and pay all taxes that come due while your bankruptcy case is pending. The bankruptcy court may dismiss your case if you do not keep up with your taxes.

If you are not sure if your tax debt meets the conditions, don’t be discouraged. The Hanson & Payne team can help you figure out if it would be appropriate to ask the bankruptcy court to forgive your income tax debt. You are not in this alone. 

Offers In Compromise 

If you have other tax debt, whether personal or business-related, filing for bankruptcy isn’t going to get rid of it. If you cannot afford to pay it off, your best option may be asking the IRS to accept an offer in compromise. 

An agreement between a taxpayer and the IRS that settles a taxpayer’s tax liabilities for less than the full amount owed is formally known as an offer in compromise (OIC). There are three circumstances in which the IRS will agree to an OIC: 

  • First, the IRS can accept a compromise if there is a genuine dispute as to the existence or amount of the correct tax debt under the law. This happens when nobody knows what the actual amount of debt is, and everyone can agree to something reasonable.
  • Second, the IRS can accept a compromise if there’s doubt as to the collectibility of the debt. When the taxpayer’s assets and income are less than the full amount of the tax liability, so the government knows they will never be able to collect the full amount, they will consider an OIC. 
  • Third, the IRS can accept a compromise based on effective tax administration. In these cases, there’s no doubt that the tax is legally owed and that the full amount owed can be collected, but requiring payment in full would either create an economic hardship or would be unfair and inequitable because of exceptional circumstances.

Some of the companies that advertise tax debt relief make it sound like meeting one of these conditions, and persuading the IRS to accept your offer in compromise is a piece of cake. The reality is the IRS rejects most OICs.  

The IRS will take a close look at your finances and estimate what it calls your reasonable collection potential (RCP). They don’t disclose this number, but it is the amount they believe they can reasonably expect to collect from you given your financial circumstances. If you submit an OIC that is well below the RCP, you will not get anywhere. 

Hanson & Payne’s experienced attorneys can help you estimate your RCP and put together a detailed and complete OIC. We are happy to work on this with your accountant or other financial or business advisors. 

Get The Help You Need To Get Tax Debt Relief 

If you are burdened by a tax debt you know you will never be able to pay off, Hanson & Payne’s experienced team of attorneys may be able to help. We push the bankruptcy courts to forgive as much old income tax debt as they can, and work with Milwaukee area debtors to persuade the IRS to reduce their other debts through an offer in compromise. Please contact us today to schedule an initial consultation.