Often, difficult financial situations seem to snowball. Various types of debt accumulate and become increasingly harder to get rid of.

If you owe federal or Mississippi state taxes, it is important to know ways to handle them. Some people assume tax debt just goes away after filing for bankruptcy, while others may have heard bankruptcy can never discharge tax debt. Both of these assumptions are wrong. The best way to handle tax debt can vary depending on your situation.

How bankruptcy handles taxes

Your bankruptcy may discharge income tax debt you owe on returns due at least three years or filed at least two years prior to your bankruptcy filing. Generally, you need to file a return before your tax debt can qualify for a discharge; sometimes, filing a late return may help in this regard.

As a rule, bankruptcy will not address tax debt you incurred through fraud or evasion. It will also not eliminate any taxes other than income taxes.

If you do obtain a discharge for tax debt, it will mean you will no longer need to repay it (other than what is part of a Chapter 13 plan). The IRS will not be able to garnish your wages or take other actions. However, if the IRS or state tax authorities placed a tax lien on your property prior to your bankruptcy, the lien will remain in place. The only way you will be able to sell that property would be to pay the tax debt that underlies the lien.

Other options

You may also consider some other ways to manage your tax debt. Both the IRS and the Mississippi Department of Revenue may allow you to make a repayment plan. You can also ask for the reduction or elimination of some penalties.

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