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If you are struggling with a significant tax bill, you may be wondering if tax debt relief can be achieved through bankruptcy. It is true that the bankruptcy process can help reduce, or even eliminate, certain tax debts, but the process to achieving that tax debt relief can be complicated and is rife with potential pitfalls.

For example, to be eligible for tax debt relief via bankruptcy, your tax liabilities need to meet a specific set of prerequisites (e.g., being over three years old and with tax returns filed at least two years ago). Understanding these requirements is crucial for assessing whether bankruptcy is a viable option for your tax debt relief objectives.

The Interplay Between Bankruptcy and Tax Debt

Filing for bankruptcy has the potential to provide a level of relief from many types of debts, including tax debt. Filing for bankruptcy also has the benefit of halting debt collection efforts. Though, it is important to understand that bankruptcy generally does not allow you to wipe away your tax debt. Hence, taxes are treated differently during bankruptcy proceedings. For example, they are typically categorized as “nondischargeable priority debt.” This is a fancy way of saying you are not allowed to eliminate the tax debts via bankruptcy, and they will need to be repaid before other types of debts (e.g., credit card debt, automobile loan debt, etc.). Nevertheless, if certain conditions are met, then some tax debts may be discharged via bankruptcy.

Prerequisites for Discharging Tax Debt

To have your tax debts discharged via bankruptcy, the first prerequisite is that the tax debt needs to be related to your income taxes, including federal and state income taxes. The second prerequisite is that your tax debt needs to be older than three years. Specifically, the original tax return should have been due at least three years prior to you filing for bankruptcy.

What About a Federal Tax Lien?

If you were notified of a federal tax lien being filed, the situation is different. For context, tax debt refers to money you owe to tax authorities such as the Internal Revenue Service (IRS). In contrast, a tax lien is a legal claim placed on your property due to unpaid taxes. This lien can impact all your assets, including bank accounts, real estate and other personal items. Bankruptcy will not eliminate a tax lien. Even if, for example, your tax debt was discharged via bankruptcy, the tax lien would remain in place.

However, filing for bankruptcy still provides protection from debt collection efforts on a dischargeable tax debt. This means that while the tax lien may remain in place, the IRS is unable to garnish your wages or freeze your bank account to collect on the debt. In addition, you can still live in your home with an active tax lien.

Have Questions About How Bankruptcy Can Impact Tax Debt Relief Options? Reach Out to Anderson Bradshaw Tax Consulting Today

If you are struggling with a significant amount of tax debt and are considering bankruptcy, the experienced professionals at Anderson Bradshaw Tax Consulting are here to help. Our firm services all 50 states and works tirelessly to achieve our client’s desired objectives. Our tax debt relief team has more than 32 years of tax experience. This means we have the knowledge and experience necessary to handle any complex tax matter, regardless of where you are located.

For further information or to schedule a consultation, please contact Anderson Bradshaw Tax Consulting at 877.550.3911 or visit www.AndersonBradshawTax.com to learn more.

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