How IRS bills are treated in Chapter 13 cases

Many people run in to financial trouble because of tax debts.

Particularly when a Maryland resident is earning money from self-employment, and thus not having their federal taxes withheld, he or she can wind up with a surprisingly high tax bill in any given year.

Of course, owing thousands of dollars in IRS tax debt can be just enough to push a person over the financial edge, especially since the IRS is well known for aggressively collecting back taxes through liens, garnishments and the like.

As we’ve said before, some tax debt can be discharged in a bankruptcy. On a related note, tax bills can also be repaid through a Chapter 13 bankruptcy.

As we’ve discussed before, debtors who file Chapter 13 will have to repay all or part of their debts over a period of three to five years. However, with respect to many income tax matters, bankruptcy law will treat the back taxes as priority claims.

This means that a debtor’s Chapter 13 installment plan will have to involve repaying all the back taxes owed.

Certain penalties and other payments may not have to be paid or may be subject to only a partial repayment.

It should be noted that certain other federal taxes, including payroll taxes like Social Security and Medicare withholdings, receive different treatment and may not be dischargeable in a bankruptcy at all.

As is the case of any other debt, while the bankruptcy is pending, the IRS will be prohibited under the automatic stay from pursuing collection efforts.

A bankruptcy attorney can answer detailed questions about how a Chapter 13 bankruptcy can give a family relief from a tax debt.