Bankruptcy and the IRS: What Relief From Income Tax Debt Is Available?

Income tax debt is often one of the most significant financial problems for Georgia consumers, who may struggle with penalties, interest and collection pressure. Bankruptcy can often provide significant relief. However, specific requirements are met for discharge or reorganization to be viable solutions.

Tax debt often arises from circumstances outside the debtor’s control, such as job loss, medical issues or unexpected financial setbacks. Bankruptcy law is meant to give people a structured way to address these challenges and regain financial stability. Depending on the age of the debt and other circumstances, either Chapter 7 or Chapter 13 may afford income tax debt relief.

Older income tax debt, as defined by the “3-year, 2-year, 240-day” rule, can be discharged in a Chapter 7 bankruptcy. This means that:

1. The tax return must have been due at least three years before the bankruptcy filing. 
2. The taxpayer must have filed the return at least two years before the bankruptcy filing. 
3. The IRS must have assessed the tax at least 240 days before the bankruptcy filing. 

Chapter 7 also discharges other debts and lets the debtor keep most or all of their assets.

Chapter 13 allows for income tax debt to be repaid through a structured plan that stops interest and penalties from accruing. The debtor can repay the IRS over three or five years without fear of levies, liens or refund seizures. How much of the debt must be repaid depends on the debt’s age. Older tax debt meeting the 3-year, 2-year, 240-day rule is treated like other unsecured debts, which means the amount of the payments is determined by the debtor’s disposable income. However, more recent tax debts are considered priority debts, so they must be repaid in full over the life of the Chapter 13 plan.

Whatever the size of the payments, a Chapter 13 plan is far more manageable than dealing with IRS collection efforts directly. Bankruptcy also stops wage garnishment, bank levies, foreclosures and other aggressive actions, protecting valuable assets such as the debtor’s home.

Bankruptcy can also help with income tax debt owed to the Georgia Department of Revenue. While the rules are similar to those for federal taxes, state tax obligations often involve additional considerations, including penalties and collection procedures. Filing bankruptcy stops state collection actions just as it stops federal ones, making it a valuable tool for anyone facing pressure from both agencies.

For Georgia consumers struggling with tax debt, understanding how bankruptcy can help is the key to making informed decisions. A qualified Georgia bankruptcy lawyer can help you pursue your options. 

Jeff Field & Associates has decades of experience helping Georgia residents get relief from tax debts and other financial obligations. We have offices in Douglasville, Gainesville, Bogart, Lawrenceville, Marietta and Decatur. Please call 404-381-1278 or contact us online to schedule a consultation.