Most people we meet with for a bankruptcy consultation (which is free, by the way) have done anything and everything they possibly could to avoid filing for bankruptcy. Often, “anything and everything” includes increasing their tax deductions and exemptions at work so payroll will start withholding less money from their paycheck. If not done right, this can lead to a very large tax bill come April 15.
The tax bill may be the symptom of larger debt problems. At this time of year we run into clients who have decreased their payroll withholding or withdrawn money from a retirement plan so they can pay their bills, and now they have a tax problem on top of their credit card debt. Tax debts can also result if you get a creditor to let you pay less than what you owe as payment in full. What the creditor may not tell you is that they are required to report the forgiven debt to the IRS on a 1099. This counts as income that you may have to pay taxes on as if you earned that money. By doing this you can go from a credit card problem to a tax problem. Unfortunately, we also see the person who takes the next step and decides that since they owe so much in taxes they shouldn’t even file a return. Now that will really get you into trouble. Don’t do that. Get your taxes filed and see some of the options you may have to deal with your taxes in the post Do You Owe The IRS Money? from Murphy & Murphy CPA.
If you, or someone you know, has this problem you may do them a big favor telling them now is the time to see a bankruptcy lawyer for a consultation. While they may not be able to discharge their tax debt in bankruptcy, they may be able to deal with the debts that are causing their tax problems. Remember, they are free and confidential, so there is nothing to lose.