Back taxes can be very problematic. Being in debt with the IRS — or a state, county or municipal authority, for that matter — can lead to miserable consequences like payroll garnishment, liens and bank levies, sometimes when you least expect them.
If you have significant tax debt and you’re wondering if bankruptcy will help you get out of the mess, the answer will depend on a number of factors. One important factor may be the amount of tax debt relative to your other debts, and another is the age of your tax debt.
Is there a bigger problem?
Tax debt may not be your biggest financial problem at all. For example, if you have $30,000 in credit card or medical debt and $1,800 in unpaid IRS debt, you may want to concentrate on frying the much bigger fish. In some cases, the cure is a bankruptcy filing to deal with the massive unsecured debt.
When bankruptcy can help
However, if unpaid taxes make up the bulk of your debt (or you have a lot of tax debt along with other kinds of debt), and a payment plan with the taxing authority won’t help, it may be time to look at other possibilities for debt relief, like Chapter 7 or Chapter 13 bankruptcy. It may not be a hopeless case — and you may not have to spend your energy chasing that “settling with the IRS for pennies on the dollar” pipe dream you learned about on TV.
In general, your tax debt needs to be old (three years old or more) and income-based to discharge in a bankruptcy. Other requirements must be met, too.
Like we’re fond of saying, every situation is different, and bankruptcy is not right for everyone. You may benefit greatly from discussing your situation with an experienced professional.