Tax issues can quickly send someone into bankruptcy but they can be more difficult to resolve than other debts because they are considered priority debts, which are generally not dischargeable. No matter what your tax situation is you will not be allowed to get out of bankruptcy without resolving your tax problems. That means that you will have to file all outstanding tax returns before your case proceeds and we recommend all clients file all outstanding tax returns and seek out the advice of a tax professional such as a CPA before filing bankruptcy. If you file a bankruptcy case with unfiled tax returns, the attorney for the IRS will file an objection to your case and it will be held up until your tax returns are filed, which could delay your case for many months.
For federal income taxes to be discharged in bankruptcy the tax return for the taxes you wish to discharge must have been filed and the liability assessed by the IRS three fiscal tax years prior to when you filed your bankruptcy petition. That means if you filed your returns on time by April 15 of each year and filed bankruptcy on March 1, 2013, you would be able to discharge federal income tax debts from only 2008 and later because the 2012 tax deadline has not passed yet and the past three years (2011, 2010, and 2009) are still not dischargeable, but after April 15, 2013 you would be able to discharge 2009 taxes and later.
Having a tax debt is a good reason to file a Chapter 13 bankruptcy because the Chapter 13 plan allows you to pay the IRS in installments over five years, but since the federal government is a priority creditor they will get paid first out of your monthly bankruptcy payments. Since most taxes are not dischargeable you will be required to pay the full amount of the tax liability in the Chapter 13 plan, which has the potential to significantly raise your monthly payment since the entire debt must be paid out in 60 months. Other non-dischargeable debts like student loans can be set up for partial payments in the Chapter 13 plan with remaining balance to survive the bankruptcy, which means you would have to resume making payments to the creditor directly after the case is over. No matter what happens you should plan on paying the IRS all the money you owe them in your bankruptcy case or your case will be dismissed.
DISCLAIMER: The attorneys at Davis & Greene are not tax advisers and will not give you any tax advice. We recommend you seek out a tax professional like a CPA to advise you on how to best handle your tax liability. This page is intended to inform potential bankruptcy clients about how taxes are treated in bankruptcy cases.