There are two primary ways to deal with tax debts. Either deal directly with the taxing authority, or discharge them through bankruptcy.

Discharging Taxes in Bankruptcy

If you file a Chapter 7 or Chapter 13, you can be forgiven of your state or federal income tax debt, as long as:

  • You have owed the income tax for more than three years.
  • You filed the tax returns, for the debt you wish to discharge, more than two years ago.
  • The IRS has not assessed your tax returns in the last 240 days.
  • You taxes were timely filed, including filing within any permitted extensions.
  • There is no fraud.

Whatever taxes that does not get discharged (forgiven), you’ll still have to pay after Chapter 7.

What if your taxes are non-dischargeable because it doesn’t mean the rules? That’s where Chapter 13 can come in handy. In Chapter 13, you will pay this money back in monthly payments that will be stretched out over three or five years. A Chapter 13 can be a lifesaver because it transforms your tax debt into a manageable monthly payment.

Handling Taxes with a Taxing Authority

Sometimes it’s best to deal directly with the taxing authority. This can include the Internal Revenue Service (“IRS”), Franchise Tax Board (“FTB”), and Board of Equalization (“BOE”), among others.

Perhaps it is simply an installment agreement where you agree to enter into a repayment over a certain period of time. An officer in compromise (“OIC”) might be a better option. With an OIC, you make your case to the IRS or FTB that you don’t have the income and assets to repay all or some of the debt. It is essentially a method of forgiveness, subject to some guidelines and discretion by the IRS and FTB.

To discuss your bankruptcy and tax options, call us at (415) 963-4004.