Filing a business bankruptcy does not automatically erase all of your tax debt. But there are some taxes that can be discharged or at the very least minimized through bankruptcy protection.
What are the circumstances for discharging taxes through bankruptcy?
In most cases, business owners are responsible for paying any taxes owed by the business when bankruptcy is declared. Certain taxes such as payroll taxes or taxes related to fraudulent tax filings or willful tax evasion cannot be discharged.
There are several rules that apply. For example, if you file your taxes, you cannot immediately file for bankruptcy and expect that those tax debts will be discharged. Some taxes, however, can be discharged if they were due at least three years prior to filing for bankruptcy with the stipulation that it has been at least two years since you filed a tax return for your business.
Additionally, it must be at least 240 days since the IRS has assessed your taxes. You must also have filed the latest four tax returns no later than the first creditor’s meeting for the bankruptcy.
What about back taxes?
The process of dealing with back taxes can be very complex. You may be able to cancel some of your tax debt if your business has not filed taxes for the past three years. If, however, you have taxes due but failed to process returns, you may not be able to cancel or discharge that tax debt.
Are there other ways to minimize business tax debt during bankruptcy?
If you are unable to discharge some or all of your tax debt, there may be other options if you are behind on your tax obligations. Sometimes you can work out a repayment plan with the IRS or enter into a compromise where you offer to pay a lesser amount than due. If the IRS agrees to honor your offer, they will erase the debt once the offered amount is paid. Sometimes filing Chapter 11 bankruptcy allows businesses to repay their tax debt over an extended period of time.
What about tax liens?
If the IRS has filed a lien on your property and you qualify for a discharge, you will not be able to get relief from the lien through a bankruptcy filing. After it has been filed, you may not be held personally responsible for an income tax lien that is associated with the lien, but in order to get the lien released, you will have to pay your tax debt.