Reduce & Eliminate Taxes through Bankruptcy

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Many, including tax professionals and bankruptcy attorneys, believe that bankruptcy cannot discharge taxes.  While the intersection of bankruptcy and tax laws, including the application of tax liens and levies, are complex, the assertion is not true.  Bankruptcy can discharge taxes and is often a powerful weapon for handling back taxes.  Additionally, unlike an offer in compromise or an installment agreement, bankruptcy can resolve nontax liabilities.

Discharge Taxes Through Bankruptcy

The goal of bankruptcy is to provide a “fresh start” by discharging the debtor from prepetition bankruptcy liabilities. The Bankruptcy Code sets forth specific categories of non-dischargeable debt; however, under the right circumstances, certain taxes can be discharged.


The Bankruptcy Code allows an individual to discharge a non-priority tax.  Generally, a non-priority tax exists if all of the following requirements are satisfied:
  • You must have filed a tax return more than two years, including extensions, before the filing of the bankruptcy petition.  Substitute returns (SFRs) filed by the IRS are non-dischargeable;
  • The tax return was due more than three years before the bankruptcy filing;
  • The tax debt was assessed more than 240 days before the bankruptcy filing; and
  • You did not engage in  fraud or tax evasion;


Many situations can toll, extend, the above time periods.  For example, the submission of an offer in compromise during the 240-day assessment period, will toll the time remaining on this period, while the offer in compromise is pending plus an additional 30 days.  Therefore, in order to maximize dischargability of old tax debt, experience in reviewing and understanding IRS tax transcripts is essential before the filing of the bankruptcy petition.

Many types of taxes are not dischargeable.  The assessment of the Trust Fund Recovery Penalty, certain custom’s duty, property taxes, and excise taxes are considered a priority claim and, therefore, non-dischargeable.

Stop creditors, including the IRS, and eliminate the accrual of interest and penalties by filing for Bankruptcy

Filing a bankruptcy petition creates an automatic stay, which precludes creditors, including the IRS and state taxing agencies, from collecting.  This can give a taxpayer breathing room from an IRS bank levy, wage garnishment, or seizure.

In a Chapter 13 bankruptcy, you may be able to stop the accrual of interest and penalties.  Accordingly, all unsecured penalties are dischargeable and can often be paid at a percentage on the dollar.  This is commonly referred to as a “cramdown.”  Unlike an IRS installment plan, one hundred percent of future payments can then go towards the principal of your debt.

The Benefits of Hiring a Tax Attorney Who Understands Bankruptcy

With a tax bankruptcy, timing is everything. Often, because of the complexity of the intersection between the bankruptcy code and tax code, many taxpayers, tax attorneys, and bankruptcy attorneys miss opportunities to discharge tax liabilities. Having a tax attorney who understands the intricacies of bankruptcy and tax can greatly improve your chances of successfully discharging IRS taxes, penalties and interest.

We can help you determine if bankruptcy is best solution to resolve your IRS and state tax problems.  While Bankruptcy can be a powerful tool in discharging old tax debt, halting IRS, state tax, and creditor collection, and reducing penalties and interest, it should be used as last means of defense. You may be eligible for an Offer in Compromise, or installment agreement, which can help you achieve the fresh start you’re looking for without tarnishing your credit score.  We can assess all tax relief strategies to determine the best solution for reducing your tax burden.

Contact Us

Todd S. Unger, Esq., provides a free, no-obligation consultation to taxpayers facing bankruptcy and other federal tax controversy matters in both New Jersey and New York. To schedule your FREE confidential consultation with a qualified New Jersey tax attorney, call us today at (877) 544-4743, or fill out a contact form.

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