Bankruptcy: A Possible Solution to Your Tax Problem

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Bankruptcy:  A Possible Solution to Your Tax Problem


                There is quite a bit of confusion out there as to whether or not bankruptcy is a good option to resolve a tax issue.  The answer to that question depends on the situation.  Bankruptcy, if done properly, can be a viable solution.  Generally, bankruptcy attorneys work with clients who not only have debt issues, but credit issues as well.  There is just simply not enough money flowing in to cover all the debt.   This can happen for a number of reasons such as lost employment, medical bills, divorce, death, and more.  If you are having tax problems it is important that you connect with an expert well versed in tax resolution and that is usually not your bankruptcy attorney (they already have their hands full.)   So, when can bankruptcy be filed in order to eliminate tax debt?  And, what situations deserve a deeper look to determine whether bankruptcy is a viable option? Here are some answers to those questions.


When can bankruptcy be filed to be impactful to a tax case?


In general, tax returns that caused the liability generally must be older in order to be removed in bankruptcy. Timing is key!


  • For returns that are filed on time, a bankruptcy must be filed more than three years after the tax return due date including the extension period to be considered for discharge. For example a 2010 return that is filed by the extension due date of October 15, 2011 would be eligible for bankruptcy discharge on October 15, 2014.
  • For returns that are filed late, a bankruptcy must be filed more than two years after the tax return was filed or three years after the tax return due date whichever is later. So, for example, if that same 2010 return was filed late on August 1, 2012, then the bankruptcy would need to be filed after August 1, 2014.  However if that same 2010 tax return was filed late on December 1, 2011, the bankruptcy must be filed after October 15, 2014.
  • If audited and assessed, the bankruptcy must be filed the later of more than 240 days after the audit is final, or (for a return filed on time) three years after the return due date including the extension period, or (for a return filed late) two years after the return was actually filed.

In all situations, the key factor is to identify the latest date possible and file the bankruptcy after that!


When can filing bankruptcy be an option to consider?


  • Bankruptcy can be an alternative to an installment agreement. Filing bankruptcy could save money in penalties and interest and could possibly reduce the amount and time to pay off the tax debt.
  • Bankruptcy can be utilized to release levies. The IRS must stop taking further action on a levy once bankruptcy is filed.
  • Bankruptcy can intervene if IRS is being unreasonable. If dealing with a revenue officer or automated collection service and an agreement just cannot be reached, filing bankruptcy causes the IRS to act under bankruptcy laws which can save time and expense.
  • Bankruptcy can leverage an offer in compromise or be an alternative to it. According to the Internal Revenue Manual, the IRS should take into consideration how bankruptcy could impact the collection of your tax debt.  Bankruptcy could drastically reduce or completely eliminate the debt owed to the IRS.  So if the IRS is not willing to work with you on your offer in compromise, letting them know you are considering bankruptcy may encourage them to negotiate. 
  • Bankruptcy can resolve both tax problems and credit problems at the same time. If you are experiencing credit problems and tax problems, bankruptcy can be solution to both.
  • Bankruptcy stops interest and penalties from accruing. Penalties and interest can be significantly reduced or completely eliminated depending on the type of bankruptcy filed.


Keep in mind that Bankruptcy can stay on your credit bureau report and other records for 7 – 10 years or more which can affect your ability to obtain credit, or increase the amount you pay for credit so consider this option very carefully!


There are many factors to consider when determining the best course of action to resolve a tax problem and bankruptcy is not a one-size-fits-all solution.  Each situation is different and we work with our clients’ individual needs to determine the best fit for them.  Hayes Financial is well versed in navigating through your options and we have a network of competent professionals in the industry who we’ve worked with if bankruptcy is the best option for you.

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