Should you file for Bankruptcy to avoid IRS/State problems? The IRS/State does not like to talk about the use of Bankruptcy to reduce tax liabilities, but the reality is that many IRS/State taxes, penalties and interest do qualify for complete discharge in Bankruptcy. 

 

You must use caution when considering whether bankruptcy will eliminate IRS/State tax debt.

  • Even when bankruptcy can help, most clients want to avoid bankruptcy if possible.
  • While certain IRS/State tax debts are eliminated by bankruptcy, NOT all tax debts can be eliminated.

 

An Offer in Compromise is often a much better alternative than bankruptcy, and the OIC can erase ALL your tax debts-even when bankruptcy won’t.

  • In order for a taxpayer to benefit from the Bankruptcy laws and avoid paying income taxes, the taxpayer’s income tax liabilities must qualify.
  • Many taxpayers and bankruptcy attorneys file bankruptcy without understanding whether the taxpayer’s income tax liabilities qualify for forgiveness. This often results in not discharging IRS/State income taxes that could have been discharged if the taxpayer had understood the bankruptcy laws.
  • The most common types of taxes eligible for discharge in bankruptcy are old individual income taxes.

 

Taxes, which are not eligible for discharge in bankruptcy, are Civil Penalties for payroll taxes.