Working Class Advantage – Can Bankruptcy Help with Back Taxes?

You may have heard the phrase “more money, more problems.” That seems to be the case for several celebrities in the past year, including actors Stephen Baldwin and Wesley Snipes, Fugees singer Lauryn Hill, and R&B diva Dionne Warwick. These celebrities each had one main source for their money woes: owing the federal government thousands, if not hundreds of thousands, of dollars in income taxes. The enforcement power of the Internal Revenue Service (the “IRS”) spells litigation and, for some, imprisonment.

It is no wonder that the average taxpayer would like to avoid receiving an IRS notice at all costs. For many people, the path to financial freedom begins with declaring bankruptcy. Bankruptcy laws allow a fresh start by discharging back taxes in certain circumstances.

First, in order to qualify for a complete discharge of tax debt, one must be eligible to file for a Chapter 7 or Chapter 13 bankruptcy. Most people seeking relief in bankruptcy court will qualify for one or the other, and the same treatment of tax debt applies in either type. You may be asking, why didn’t the above-mentioned stars file for bankruptcy? None qualified for Chapter 7 or Chapter 13 due to their higher incomes. The average wage earner prevails in this instance!

Next, what was the due date for filing taxes? If it has been more than three years, you meet the next criteria for eligibility of discharge.

The taxpayer must have actually filed their taxes for the assessed period, meaning that if someone has not yet filed, they would not be eligible under those circumstances for bankruptcy relief.

Finally, the taxpayer may not have filed a fraudulent return in order to avoid tax debt or to evade paying taxes.

In summary, as long as the tax return was filed within one year of the due date, the due date was at least three years ago, and there was not an attempt in filing to either commit fraud or evade taxes, the taxpayer has a good chance of qualifying for discharge of that tax debt in bankruptcy court.

Remember to seek help from an experienced bankruptcy attorney who understand the process and can advise you on how to navigate your particular situation.