IRS Tax Problems – Chapter 13 Bankruptcy

People with tax problems can no longer take advantage of the famed super discharge that was previously available when filing a chapter 13 bankruptcy . The 2005 Changes to the Bankruptcy Code ensured that fewer debtors would be able to discharge their tax liabilities in bankruptcy. Prior to the changes, a debtor with tax liabilities could easily discharge most, if not all, of the taxes, interest, and penalties owed simply by filing a Chapter 13 bankruptcy case. This was primarily due to Congress’ desire to have more debtors file for a Chapter 13 rather than a Chapter 7.

Changes to the Bankruptcy Code have made the prospect of discharging taxes in a Chapter 13 bankruptcy substantially more onerous. The requirements for discharging taxes are now the same regardless of whether a debtor files a case under Chapter 7 or Chapter 13 of the Bankruptcy Code. This means that fewer remedies exist for a debtor with rid themselves of tax liabilities.

Although the ability to relieve tax debt through bankruptcy has largely been eroded, a debtor can still seek an Offer in Compromise. This is an agreement between the taxpayer and the IRS that allows a debtor to pay a reduced sum of their tax debt, including penalties and interest , in either a lump sum payment, or over an abbreviated period of time. An Offer in Compromise can often result in debtors paying 20% or less of their tax debt over to the IRS.