Can Bankruptcy Help with a Serious Tax Problem?

Yes. Bankruptcy is one way to deal with a serious tax problem.

Bankruptcy can be a very effective forum in which to deal with tax issues for a number of reasons:

  • Some taxes can be discharged in bankruptcy. For income taxes, to be discharge-eligible, they must meet a three-part test:
    • Relate to a tax year more than three years old.
    • A tax return must have been filed for that tax year by the taxpayer more than two years before the bankruptcy was filed.
    • The IRS or state tax agency must have assessed the tax more than 240 days before the bankruptcy was filed.
      • Note: There are events that can “stop the clock” on the above events, so discuss your case with an experienced lawyer.
  • Other taxes sometimes can be discharged if the government fails to file its proof of claim by the deadline date set by the court and the debtor completes his plan as confirmed by the court in Chapter 13.
  • Tax liens can be contested, and determinations made by the court as to the validity, or value of the taxpayer’s property that is covered by the lien.
  • If there is a dispute as to legal liability for the tax or the amount due, the bankruptcy court is a forum in which this can be determined by a judge.
  • The bankruptcy judge is:
    • Independent and not employed by the IRS or state tax agency.
    • A specialist in financial matters, including tax.
  • The debtor is protection by the court from enforcement action by the IRS or state tax agency while the case is pending. The government must seek permission from the court, for which the taxpayer will get notice and the opportunity to object, before it can proceed on any enforcement action.
  • The taxpayer is put on equal footing with the government before the court.

The type of relief available can vary depending on the bankruptcy chapter selected by the tax debtor.

Sometimes, however, bankruptcy may not be a viable option, particularly if the taxpayer is solvent, has valuable assets that would be at risk in bankruptcy, significant cash-flow, or the size or type of tax owing is not one that can be easily addressed in a bankruptcy proceeding.

The options should be thoroughly vetted with experienced counsel.