You may have heard that filing for bankruptcy won’t help you if you owe the IRS a large sum of money. Most of the time, that is true.

The nuanced truth is that, in some circumstances, declaring bankruptcy might eliminate tax liability. We’ll be here to help you determine whether filing for bankruptcy is a viable choice if you’re having trouble paying back taxes that you can’t afford.

The following are the requirements for discharging debt.

The debt Type Must Be an Income Tax Debt

The first prerequisite for a tax debt to be dischargeable is that it is an income tax debt. This would include overdue federal and state income taxes but exclude, for instance, back payroll taxes like Social Security and Medicare withholding.

The Debt Must be Three Years Old or More

The tax debt cannot be too recent in order for you to stand a chance at reducing your tax liabilities. Typically, it cannot be older than three years.

A Valid Tax Return must have been Filed Two Years Prior

Next, at least two years before to filing for bankruptcy, you had to have submitted a legitimate tax return for the debt. Additionally, the return has to be turned in on time. If you asked for and received extensions, it is deemed “on time” if you submitted your paperwork by the extension deadline. If you submitted your return after the deadline for the extension, it might not be accepted, and you won’t be able to erase your tax liability.

The IRS Must Have Recorded the Debt Earlier

The IRS must have assessed the obligation—that is, documented it on the agency’s books—at least 240 days prior to the bankruptcy filing. If the IRS has not yet assessed the debt, this criteria may still be met.

If the IRS did assess the debt and subsequently stopped collecting it because of a prior bankruptcy petition or another reason, the typical 240-day time period could be extended, potentially making it more difficult to discharge the debt.

You Had Filed Your Returns Honestly

Be aware that bankruptcy will not shield you from liability if you attempted to escape paying taxes or filed a false return. You were required by the law to have submitted your returns truthfully. Be aware that different court systems can have different requirements for paying off tax obligation through bankruptcy. We’ve covered the main prerequisites, however regional laws may have additional needs.

The IRS Did Not File a Tax Lien on Your Assets

Last but not least, it’s crucial to ensure that the taxing agency—typically the IRS—has not placed a tax lien on your property. If a lien has been put in place, filing for bankruptcy won’t remove it. This requires special attention because it is one of the most common barriers to receiving tax relief through bankruptcy.

If you have met all the criteria on this list, then filing for bankruptcy might be an option in your favor.

If you require assistance for tax liabilities and other tax-related issues, don’t hesitate to reach out for help. Seek expert advice from our range of tax debt solutions!

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