While many people will enjoy a refund after they file their 2021 taxes, some will be hit with a big tax bill instead. This most often happens to small business owners, freelancers, and independent contractors who might not have been able to pay their monthly expenses and pay exorbitant quarterly tax bills too.

Obviously the IRS has a great many tools at its disposal that it can use to encourage people to pay their taxes as owed. You can try to work with them to create payment plans or offers in compromise, but sometimes tax debt just gets completely out of control. 

Fortunately, bankruptcy can address some (though not necessarily all) of your income tax issues.

Does filing bankruptcy stop tax garnishments?

Yes, at least for the duration of your automatic stay. The duration of your automatic stay will depend on which form of bankruptcy you file.

Are all income taxes dischargeable?

Old income tax debt is dischargeable. 

Tax debt that is over 3 years old may be discharged like any other bankruptcy debt. Note that if you filed an extension those extensions must be taken into account when determining whether the debt is old enough to discharge or not. Audits can also push back the date.

What about taxes that you can’t just discharge?

If you file Chapter 13 bankruptcy then you can fold the rest of your taxes into your Chapter 13 plan. This means you’ll make one lump sum payment to all your debts and the IRS will be accepting that portion of your taxes from the trustee.

During that time, they cannot garnish your wages, take you to court, call you about your debt, or otherwise harass you.

Other Steps to Take

Obviously you don’t want to be running up more tax debt while trying to deal with the old tax debt in bankruptcy. After you file for bankruptcy is an excellent time to reassess how you’ve been doing your taxes and expenses and figure out how you can reorganize your finances so you no longer owe anything come tax time. The ideal scenario is you owing nothing to the IRS and the IRS owing nothing to you.

This may mean hiring an accountant, cutting some expenses so you can live on a proper take home pay, or taking other steps to ensure that you never run up a large tax debt again.

Need help? Reach out to our law office for a free consultation.

See also:

Should You Consolidate or Try Chapter 13? 

How Covid-19 Has Changed Bankruptcy Law

Are You Waiting Too Long to File Your Orange County Bankruptcy?