Can Back Taxes be Discharged in Bankruptcy?

This is probably the most common tax problem clients face. It needs to be addressed sooner, rather than later, for a number of reasons. Tax debts are financial cancer.

The rate of growth is usually double-digits and it’s not uncommon to see a tax debt double and triple over the years. One reason is that, in addition to interest, tax debts also incur penalties. Furthermore, if the client has not filed a tax return for the year in question, another layer of penalties is added for failure to file.

When it comes to collection, the tax authority has extraordinary powers not available to collectors of private debts: The tax agency does not have to take the tax debtor to court to get a judgment first. Once the agency has run through the required administrative steps, it merely sends a garnishment order to the employer, bank, or whomever holds your investments or contract payments owed to you to turn over whatever is necessary to satisfy the tax debt. And, since the earnings from the account or payments are reported to the agency by the payor, it is not difficult to locate the tax debtor’s assets.

Finally, tax debts reported on a credit report are death to getting new credit. Lenders are very aware of the tax agency’s powers to collect. Since the tax agency is not restricted in the amount it can take from a tax debtor’s paycheck check, generally about 25% in many states, lenders steer clear of the tax debtor knowing the eventual garnishment will not leave him enough to make his monthly installment to them.

There are a number of ways to deal with back taxes. Administrative procedures available from the agency include offers in compromise based on doubt as to liability or inability to pay (difficult to win), innocent and injured spouse relief, installment agreement, etc. Relief may also be available in judicial forums such the state and federal courts.

The first step is to recognize the problem, and decide to get the help necessary to address it.