Income tax debt has a tendency to build rapidly. Once people underpay their taxes, the Internal Revenue Service (IRS) may start assessing penalties and adding interest to the balance due. The IRS has the power to garnish people’s wages or use their most valuable assets as collateral for income tax debts. They can also refer cases involving fraud or intentional tax evasion out for prosecution.
Taxpayers who are aware that they have a sizable income tax debt may need help looking for possible solutions. They can sometimes make an offer in compromise that allows for a settlement or a structured payment plan. Other times, they could qualify for innocent spouse relief if they were unaware of the issues with household income tax returns.
Personal bankruptcy can also be beneficial for those dealing with high levels of personal income tax debt. What relief does bankruptcy offer those dealing with income tax debts?
A break in collection efforts
Particularly when people worry about legal action brought by the IRS or other creditors, bankruptcy can provide immediate relief. The day that an individual files their paperwork with the courts, they receive an automatic stay. All collection attempts, including pending lawsuits, typically need to end until the resolution of the bankruptcy filing. A temporary break from collection efforts can give people an opportunity to plan their next steps and protect their resources.
The elimination of older debts
Contrary to what some people assume, it might actually be possible to discharge certain income tax debts during a successful bankruptcy case. Any income tax debts that are more than three years old may be eligible for discharge in a successful bankruptcy filing. Newer debts may still require repayment, but the elimination of older balances may make it easier for people to repay what they owe.
The discharge of other obligations
Even in cases where the income tax debt is newer and is therefore not eligible for discharge, other financial obligations owed by the taxpayer could be eligible for discharge. Eliminating medical debts and credit card balances can make it easier for them to focus on paying their income tax obligations.
People concerned about income tax debts may need help exploring their options, including personal bankruptcy. Discussing a past-due balance with a skilled legal team can help a taxpayer determine the best path forward.