An Offer in Compromise

• If you do not dispute your tax liability but have substantial difficulty paying the bill, you potentially qualify for an offer in compromise in states such as California. An offer in compromise enables individuals and business owners to partially repay their tax debts. Generally, you must have low income, few assets and little hope of gaining more assets or income in the future. You must have filed all expected tax returns, and complete an application detailing your financial situation including expenses. Some state taxation bodies, such as the California Franchise Tax Board, will also review your consumer credit report to verify your financial situation.
  
  

Payment Plans

• Many states, including New Jersey, also offer struggling individuals and business owners installment payment plans. The taxpayer must apply for assistance and propose repayment terms. Missed installment payments can reactivate collections activities unless a taxpayer proves an extenuating financial or medical circumstance. Some taxation agencies do not halt interest or penalty fees during an installment payment plan.
  
  

Chapter 7 Bankruptcy

• You can fully discharge some state, local and federal tax income in Chapter 7 bankruptcy. The tax returns must have been filed at least three years before filing bankruptcy; you must work out payment arrangements with the state government for newer taxes. Also, to qualify for debt forgiveness under Chapter 7, you generally must earn less than your state's annual median income level. As of 2011, the annual median income figure for a single California resident was $48,009, while the yearly median income level for a single New Jersey resident was $59,060, according to the U.S. Trustee Program.
  
  

Chapter 13 Bankruptcy

• If you earn more than your state's annual median income level and were unable to prove your inability to partially repay creditors and support your family, you can file Chapter 13 bankruptcy. Chapter 13 will fully or partially discharge eligible state, local and federal income tax bills along with many of your other debts. Whether or not you have to partially repay tax bills incurred more than three years prior to filing bankruptcy depends upon your income, assets and other debts owed.
  
  (References 1 and 2)