Don't Count on Bankruptcy to Solve Your Tax Problems

If you are being hounded by creditors—say, you racked up a huge hospital bill during a recent illness, or you were laid off and had to refinance your mortgage—you can usually declare bankruptcy in order to clear (or at least greatly diminish) the debts you owe. However, this strategy is virtually useless if you have fallen behind in your taxes or owe a huge back tax debt, since the IRS will compel you to pay the full amount sooner rather than later.

There Are Limited Circumstances in Which Bankruptcy Can Clear Your Tax Debt

Just how difficult is it to eliminate the taxes you owe to the federal government by filing for bankruptcy? Here are the applicable rules:

  • Your tax debt must apply exclusively to your personal income taxes; you can't get off the hook for serious crimes like payroll tax evasion, and a bankruptcy filing won't wipe out fraud penalties.
  • Your tax debt must be at least three years old. By this point, in most cases, the IRS will have successfully acquired most of its money, or you and your tax lawyer will have worked out an Offer in Compromise plan.
  • You did not willfully evade your taxes or commit any kind of fraud. This is a high bar to clear; basically, you have to show that your tax debt was the result of an honest mistake, and not an attempt to defraud the government of its money.
  • You actually filed a tax return. A bankruptcy filing will be of no use if you neglected to file your taxes in any given year, or for multiple years on end; even if you succeed in filing for personal or business bankruptcy, you'll still be on the hook for the full amount owed.

Never Declare Bankruptcy to Get Out of Your IRS Debt

If your personal finances are in a shambles and you're being harassed by creditors, a Chapter 7 or Chapter 13 bankruptcy filing may be the way to go. But you should never consider filing for bankruptcy simply because you owe the IRS a lot of money, since—given the restrictions listed above—this strategy will virtually never work. Questions? Contact the Oklahoma tax professionals at Travis W. Watkins, PC (800-721-7054) to learn what we can do for you today!