Past due tax debts have more serious consequences than other types of debts. Unlike most creditors, the IRS can seize your wages without obtaining a judgment. An IRS wage garnishment make your financial situation much worse. However, the IRS will give you warning before they pursue collection actions. This gives you time to look at options for stopping IRS collections. Depending on your situation, the following options may be possible:
- Alternative payment plans: You may be able to negotiate with the IRS before they begin garnishing your wages. In some cases, the IRS will allow you to make monthly payments until your debt is satisfied. You may also qualify for an offer in compromise. This is where the IRS allows you to pay off your debt at a discount. Not everyone will qualify for these options.
- Request a CDP Hearing: A Collection Due Process hearing (also called CDP hearing) allows you to appeal IRS collection actions. If the IRS made a mistake while sending you paperwork, or is trying to collect taxes past the statute of limitations, your appeal might succeed. However, there is a small window of time to ask for a CDP hearing. It is important to request the hearing right away if you believe a mistake has been made.
Can You File for Bankruptcy on Tax Debts?
In some cases, you may be able to file for bankruptcy to discharge your past due taxes. However, you must meet the right criteria to qualify for this option.
- Your tax debts must be for income taxes.
- Tax debts are only dischargeable if you did not commit fraud or willful evasion.
- The debts must be three years old and you must have filed returns.
- You must have filed tax returns for eligible debts at least two years before your bankruptcy filing date.
- Your tax debts must pass the 240-day rule. This means the IRS must have assessed your tax debt 240 days prior to your bankruptcy filing date.
If you meet these qualifications, you may file Chapter 7 bankruptcy or Chapter 13 bankruptcy to discharge your tax debt. By filing bankruptcy, your past due taxes would become unsecured, nonpriority debt. Chapter 7 bankruptcy could discharge the debts. Chapter 13 bankruptcy would allow you to pay back a portion of the debts during a three to five-year repayment plan. After completing the repayment plan, your tax debt would be discharged.
There are several options to consider for easing the financial burden created by tax debts. The Kansas City bankruptcy attorneys at The Sader Law Firm can help you look at the best options for your situation.