How tax debt can be dealt with depends on many factors. You must first ascertain the type of taxes that are owed. Past due income taxes have the best chance of being discharged in a bankruptcy, while taxes that are classified as “trust” obligations cannot be discharged. “Trust” taxes are taxes that you collect on behalf of a taxing authority, such as payroll taxes or sales and use taxes, and they are the most difficult to resolve. Usually the only option for trust fund taxes is to reach an agreement with the taxing authority for a manageable repayment plan.
Past due income taxes that are more than three years old (where at least three years have elapsed since the tax return should have been filed) could potentially be discharged in bankruptcy. To have the taxes discharged, you would have to have filed your tax returns at least two years ago. Additionally, no “assessments” could have been made by the taxing authority during that time. Certain other limitations may apply and numerous other factors have to be taken into consideration when deciding if taxes are dischargeable. In the event that your taxes are not dischargeable, you may still benefit from utilizing the bankruptcy process to stop harassment and collection activity and to devise a repayment plan that would work with your specific financial situation.
There are also non-bankruptcy options available to resolve past due tax debt. Both the IRS and the State of New Jersey have different options for dealing with back taxes. Depending on your specific circumstances, you may be able to negotiate a settlement of your outstanding obligation where the entire indebtedness is reduced, or in the alternative, reach an agreement on a workable repayment plan.