Can Bankruptcy Eliminate IRS Tax Debt? Mississippi Tax Debt Relief Options

As tax season approaches, many Mississippi residents facing IRS debt are searching for relief options. Bankruptcy is often considered a last resort for those overwhelmed by financial obligations, but can it eliminate tax debt? The answer depends on several factors. While some tax debts may be discharged through bankruptcy, others remain non-dischargeable. Understanding which taxes can be discharged and how bankruptcy affects IRS collections is essential before making a financial decision.

Can Bankruptcy Eliminate IRS Tax Debt in Mississippi?

Certain income tax debts may qualify for discharge through bankruptcy, but only if they meet specific legal criteria:​

• The tax debt must be from a return that was due at least three years before filing for bankruptcy.
• The tax return must have been filed at least two years before the bankruptcy case.
• The IRS must have assessed the debt at least 240 days prior to filing.
• There must be no fraud or intentional tax evasion involved.

These rules determine which income tax debts may qualify for discharge, while other types—such as payroll taxes and penalties related to fraud—are not dischargeable. These guidelines are detailed in the IRS's Bankruptcy Tax Guide.

Chapter 7 vs. Chapter 13 Bankruptcy: How They Affect Tax Debt

​Chapter 7 may help eliminate some older tax debts, while Chapter 13 allows you to set up a structured repayment plan. To understand how each bankruptcy type works beyond tax debt, our Mississippi bankruptcy guide provides a full breakdown of Chapters 7, 11, 12, and 13

Chapter 7 Bankruptcy

• Discharge of Qualifying Debts: In some cases, Chapter 7 bankruptcy may discharge certain income tax debts if specific conditions are met.
• Eligibility Requirements: Debtors must pass a "means test" to qualify, which assesses income and expenses to determine eligibility.
• Tax Liens: Even if the underlying tax debt is discharged, federal tax liens that were recorded before filing may remain, allowing the IRS to claim assets secured by the lien.​

Chapter 13 Bankruptcy

• Repayment Plan: Involves a court-approved repayment plan lasting 3-5 years, allowing debtors to repay all or part of their debts.
• Priority Debts: Enables structured repayment of priority debts, including recent taxes that may not be dischargeable under Chapter 7.​
• Flexibility: Provides more flexibility in dealing with tax debts that don’t qualify for discharge, potentially stopping IRS collection efforts and allowing debtors to pay off non-dischargeable taxes over time.​

Understanding these distinctions is crucial when considering bankruptcy as a solution for tax debt. Consulting with a legal professional can provide guidance tailored to individual circumstances.

How Bankruptcy Affects Tax Obligations During and After Filing

Taxpayers filing for bankruptcy must follow specific IRS rules regarding tax filings and payments:

• Filing Tax Returns: All required federal tax returns must be filed for tax periods ending within four years of the bankruptcy filing. These returns should be submitted before the date set for the first meeting of creditors. 
• Ongoing Tax Obligations: During bankruptcy proceedings, taxpayers are required to continue filing timely tax returns or obtain extensions and pay all current taxes as they come due. Failure to comply can result in the dismissal or conversion of the bankruptcy case.

Personal Liability vs. Tax Liens

Although bankruptcy can erase some IRS tax debt, any tax liens recorded before filing will remain in place, meaning the IRS still has a claim on the affected assets. Even after a bankruptcy discharge, the IRS can still enforce these liens, which may impact future property sales or refinancing. Resolving tax liens requires separate legal action beyond bankruptcy.

Can the IRS Take My Tax Refund If I File for Bankruptcy?

Yes, the IRS can offset your tax refund against outstanding debts even after filing for bankruptcy. The impact depends on when the refund is issued:

• Pre-filing refunds: If you file for bankruptcy before receiving your tax refund, the refund is considered part of your estate and may be used to pay creditors.
• Post-filing refunds: The IRS may still seize refunds to cover non-dischargeable tax debts.
• Chapter 13 cases: Refunds may be applied toward the repayment plan.

To prevent losing refunds, consult a bankruptcy attorney before filing to discuss your options. 

How Long Before You Can File Bankruptcy on Tax Debt?

The waiting period to discharge tax debt depends on three key timeframes:

• Three years since the original tax return was due.
• Two years since the return was filed.
• 240 days since the IRS assessed the tax liability.

If these conditions are not met, the tax debt remains non-dischargeable, meaning you will still owe it even after bankruptcy.

Alternatives to Bankruptcy for Tax Debt Relief

When bankruptcy isn’t the best route for resolving IRS tax debt, taxpayers can explore alternatives like:

Offer in Compromise (OIC): If you can prove financial hardship, the IRS may settle your tax debt for less than you owe—but approval rates are low.

Installment Agreements: If you can afford monthly payments, this plan lets you spread your debt over time and stop aggressive IRS collections.

Currently Not Collectible (CNC) Status: If you can’t pay at all, the IRS may pause collections, but penalties may still accrue.

A bankruptcy attorney can help you decide whether bankruptcy or an alternative tax relief option is best for your situation

Consumer Protection and Bankruptcy

​The Federal Trade Commission (FTC) plays a pivotal role in safeguarding consumers during bankruptcy proceedings. The FTC’s Bureau of Consumer Protection actively works to prevent unfair, deceptive, and fraudulent business practices. This includes enforcing laws that protect individuals filing for bankruptcy from abusive behaviors by creditors and debt collection agencies. The Bureau achieves this by collecting consumer reports, conducting investigations, initiating legal actions against violators, developing rules to maintain a fair marketplace, and educating both consumers and businesses about their rights and responsibilities.

If bankruptcy does not eliminate your IRS tax debt, there are several alternatives to consider:​

1. Negotiating a Repayment Plan with the IRS: You can enter into an Installment Agreement, allowing you to pay your tax debt over time in manageable monthly payments.​
2. Seeking Penalty Abatement: If you have a legitimate reason for late payments, such as a serious illness or natural disaster, you may qualify for penalty relief. The IRS considers reasonable cause when evaluating requests for penalty abatement.​
3. Exploring Tax Relief Programs: The IRS offers various programs to assist taxpayers facing financial hardship. One such option is an Offer in Compromise, which allows you to settle your tax debt for less than the full amount owed if you meet specific qualifications.​

It's essential to consult with a tax professional or legal advisor to determine the best course of action based on your individual circumstances. They can guide you through the available options and help you negotiate effectively with the IRS.

Common Questions About Bankruptcy & IRS Tax Debt

Can bankruptcy remove IRS tax debt?

Yes, but only if the tax debt is at least three years old, the tax return was filed on time, and the IRS assessed the debt at least 240 days before filing. Other tax debts, like payroll taxes, are not dischargeable.

Will bankruptcy stop IRS collections?

Yes. When you file for bankruptcy, an automatic stay immediately stops IRS wage garnishments, levies, and collection efforts. However, tax liens recorded before bankruptcy will remain, even if the debt is discharged.

Can the IRS take my tax refund if I file for bankruptcy?

Possibly. If the refund is from before filing, it may be used to pay creditors. In Chapter 13 bankruptcy, tax refunds may be included in the repayment plan.

Should I file for bankruptcy or apply for an Offer in Compromise?

Bankruptcy is usually faster and more effective at eliminating tax debt, while an Offer in Compromise (OIC) lets you settle for less but is harder to qualify for. A bankruptcy attorney can help determine the best option.

How Davis & Davis, PLLC Can Help

At Davis & Davis, PLLC, we understand that financial difficulties can make it hard to afford legal fees upfront. That’s why we offer flexible payment plans on bankruptcy cases, making it easier for you to take the first step toward financial stability. Our team will work with you to explore the most affordable options while helping you navigate the bankruptcy process.

Take the First Step Toward Financial Freedom

Tax debt doesn’t have to control your future. With the right legal guidance, you can regain financial stability and work toward a fresh start. At Davis & Davis, PLLC, we’re committed to helping you find the best path forward.

Contact Davis & Davis, PLLC today at (228) 275-9922 for a free consultation, and let’s discuss how we can help you achieve lasting financial stability.