Many people who can't afford to pay the taxes they owe choose to eliminate their tax liability by filing bankruptcy. Certain federal income taxes that were due more than three years ago can be discharged in a Chapter 7 bankruptcy if several conditions are met. One condition is that you accurately reported all the information on your return. In addition, you must have filed the return at least two years before seeking bankruptcy. Even if your taxes are discharged in the bankruptcy, any IRS (I-R-S) liens on your property prior to filing bankruptcy are still in effect, so it's best to contact the IRS and make arrangements to have any liens removed. In some cases, a bankruptcy will erase some, but not all, of your tax bill. If you still owe the IRS after the bankruptcy, you may be asked to pay the taxes at a later date. If you've entered into a repayment plan with the IRS as a condition of your bankruptcy and fail to fulfill your obligation, the IRS may seek to recover the taxes you owe. One appealing factor of filing bankruptcy for many taxpayers is the 'automatic stay' imposed on all creditors. This motion prohibits any collection action from being taken against you during the bankruptcy. More specifically, the IRS generally can't issue any liens or levies against your property during the bankruptcy proceedings. Though the automatic stay imposes restrictions on IRS collection efforts, the IRS still has the authority to continue an existing audit of your tax return and issue a 'notice of tax deficiency.' Though your tax liability may be erased, filing bankruptcy usually has negative effects on your credit rating, so consider all your options carefully.
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