Debt piled on debt ... Once upon a time, claiming bankruptcy was like a "get out of IRS debt free" card. Those days are long gone, and getting a bankruptcy discharged is much harder now. But if you really want to complicate an already complicated process, then try to include a tax debt when you are claiming bankruptcy.
You can't get off the hook that easy ... Although an IRS debt can be included when claiming bankruptcy, it is very difficult. There are a number of factors that contribute to a tax debt not being able to be included. On top of that, bankruptcy attorneys are not very experienced at tax law, and they can easily make a mistake that won't allow your IRS debt to be considered.
Pulling back the curtain ... I want to help you understand what requirements there are, and give you an alternative to dealing with your tax debt outside of bankruptcy. So how do you get an IRS debt included in a bankruptcy, and what are some of the problems with including an IRS debt in a bankruptcy?
You can not include any years that you owe tax debt which are more recent than 3 years ago. That means if you're claiming bankruptcy in 2008, the latest year that you could claim back IRS debt from would be 2005.
Even though the IRS can't pursue any collection actions against you during the period you're in bankruptcy, the interest and penalties continue to add onto to the tax debt during the time it takes for the bankruptcy to be processed. And if your bankruptcy is dismissed, you'll owe all that money to the IRS.
The time spent in bankruptcy extends the Statute of Limitations on the IRS debt. Normally the IRS only has 10 years to collect a tax debt from you. But the length of time you were in bankruptcy extends that time period.
There is an alternative ... What else can you do with an IRS debt if you can't get it discharged when claiming bankruptcy? Since you're filing bankruptcy, you're in a pretty desperate financial situation. This can make you a prime candidate to settle your tax debt with the IRS outside of bankruptcy.
It's not all bad news ... You may qualify for an Offer in Compromise depending on how damaged your financial situation is. With an Offer in Compromise, you can negotiate with the IRS to get your tax debt settled for a single lesser payment. An Offer can take as long as a bankruptcy to be approved, and it does have a much lower chance of succeeding. In fact, only 2% of Offers are accepted. To learn more about the specifics and requirements for an Offer in Compromise, read my article, "Settling Your IRS Tax Debt for Pennies on the Dollar". Also talk to your bankruptcy attorney.
