How To Understand IRS Taxes and Bankruptcy

Can I discharge income tax debt by filing for bankruptcy? This is a question many people ask because they are looking for a way out without paying what they owe. Generally speaking, you can discharge all of your income tax debt by filing for Chapter 7, and you can discharge part of your tax debt with Chapter 13. Chapter 13 typically allows for taxes to be partially discharged and the rest paid back with a payment plan. Of course, bankruptcy is not something that everybody can do. You have to meet several qualifications before you can discharge your income tax debt through bankruptcy. Here's how to meet those requirements.

Chapter 7 Qualification and Requirements:

1. Must file the proper tax return. Even if you cannot afford to pay your debt you must still file a return with the IRS. If you do not do this you are not able to file for bankruptcy and have your tax debt discharged.
2. The debt must be related to a tax return that is three years old or more. For instance, filing for bankruptcy in 2009 means that tax debt from 2006 or prior can be discharged. Anything after that is not eligible.
3. To have your debt discharged the IRS must assess it at least 240 days prior to the filing date. This is the one qualification that many people forget about – don't let this happen to you.
4. The only type of tax debt that can be discharged through bankruptcy is income tax – all other types do not qualify. Make sure you are well aware of how much debt you will be getting rid of; it may not be as much as you think.
5. The debt that you are interested in discharging cannot be associated with any type of fraud, such as tax evasion. If it is, you are not going to be eligible to file for bankruptcy to get rid of the debt. 
6. You need to complete a Credit Counseling with a Federal Government Agency and Fill out a Statement of Financial Affairs
7. Income in the last 180 days for you is below your State's Median income.

If you don't met these qualifications you can look to file for Chapter 13 and Chapter 13's qualifications are as follows:

1. All tax returns for the previous 4 years were filed before filing for bankruptcy.
2. Secured debts do not exceed $1.01 million and unsecured debts are not greater than $337,000.
3. You agree to complete a Credit Counseling with a Federal Government Agency and Fill out a Statement of Financial Affairs.
4. You provide a payment plan proposal that is reasonable and approved by court appointee. 
5. The debt is not associated with fraud, tax evasion, or business taxes.

In most cases, you will also be asked to provide any creditors, as well as the judge, with a copy of your most recent tax return. Make sure you have this available so you do not get hung up on a minor detail at the very last minute.

Bankruptcy is complex and the qualifications above are not exhausted - especially when a taxpayer is trying to qualify in order to discharge State taxes as each state is different. Before just concluding you want to file for bankruptcy, look to settle your taxes because settlement will have the least negative impact on your credit (if any at all). Tax settlement can include payment plans such as Installment Agreements that pay the IRS over time, or even Partial Payment Installment Agreements where you pay the IRS over time but the total sum paid is less than you owe.