Chapter 13 can subdue overdue tax liabilities

Tax season has come and gone for most Mississippians, but this time of year there are bound to be some state residents still trying to pay off their tax debt from the previous year. Some are able to get a handle on the problem simply by filing for an extension with the Internal Revenue Service. For others, though, their financial challenges may be so great that Chapter 13 bankruptcy may be the most appropriate option.

Tax debt is notoriously difficult to get rid of. The IRS has a reputation of being a particularly aggressive collector, and many who owe the agency are understandably fearful of the consequences of owing. If a debtor's tax burden is so great that increasing income or decreasing expenses will barely put a dent in his or her debt, he or she may want to explore either bankruptcy or working directly with the IRS.

Many people know that debtors are often able to work out settlements with private collectors, but few know that the same option may be available when dealing with the IRS. If a person is truly unable to pay the IRS their entire tax liability, and they are certain no mistakes were made in calculating that liability, they may be able to make the IRS an offer in compromise. This is usually an option for federal taxes which are overdue, and can't be realistically paid back - or, if paying them back would create genuine financial hardship for the payer. The debtor will typically offer to pay a portion of what they owe, and the IRS can choose whether or not to accept that offer. Factors the agency considers when deciding are the person's income, expenses, ability to pay and equity in assets.

While this is an extremely helpful option for some, it may not be for everybody. Some taxpayers' debts are so overwhelming, or their financial situation so strained, that coming up with even a portion of their tax debt is next to impossible. For these individuals, Chapter 13 or Chapter 7 bankruptcy may be an option. Filing for Chapter 13 is more common, as it allows individuals to get their debt under control by adhering to a reasonable repayment plan.

For those who choose this option, it's important to know that tax returns must still be filed for the tax periods which end within four years of the initial bankruptcy filing. In addition, during the bankruptcy, required tax returns must still be filed. Finally, current taxes cannot be ignored during the bankruptcy.

Source: Fox Business News, "Can I file bankruptcy on the taxes I owe the IRS?" Judy O'Connor, July 3, 2014

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