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Monday, February 21, 2011

How does filing bankruptcy affect IRS tax debt

Bankruptcy and tax debt
Debt payment obligations may be adjusted via bankruptcy

Filing for bankruptcy may or may not affect Internal Revenue Service (IRS) debt depending on  the type of bankruptcy,  judicial decisions,  IRS regulations and  Documentation filed with the IRS by the individual or persons filing for bankruptcy.

There is no one answer for how bankruptcy affects taxes because there are multiple situations and rules that affect money owed. In light of this, a methodology for assessing tax due to IRS is discussed hereafter. Numerous factors can affect whether or not, and how much tax a bankruptcy petition filer may owe in taxes. Some of these factors are listed below:

• Ability to repay as assessed by the IRS
• Formal discharge of tax debt by bankruptcy court
• Compliance with tax code and bankruptcy regulations
• Taxable bankruptcy exempt assets owned by the filer
• Carrying out of tax and bankruptcy related filings

Direct tax benefits of filing for bankruptcy


Bankruptcy can affect IRS debt by legally demonstrating the inability to pay taxes. This inability to pay taxes can be determined by both the bankruptcy court and the Internal Revenue Service.

Filing for bankruptcy can also affect IRS debt by reducing the total amount of assets one owns that can be used for the purpose of paying taxes depending on the priority of debt in order of repayment.
Since bankruptcy is a second chance financially, taxes that do not enable this second chance in principle may be exempt from repayment. Some of the ways filing for bankruptcy may affect IRS debt are as follows:

• May redistribute payment obligations
• Taxes due can be negotiated with the IRS
• May reduce taxable value of personal assets
• Can limit tax liens and back taxes due

Bankruptcy tax assessment methodology


Since the purpose of bankruptcy is to reduce or make debt manageable, taxes due to the IRS are no exception. For this reason, realistically, factually and thoroughly approaching the question of how filing for bankruptcy affects IRS tax debt may involve a number of techniques, and/or methodologies. An example methodology is provided below.

1. Determine type of bankruptcy and if judicial rule will override IRS regulation
2. Identify assets not included in the bankruptcy which taxes may be due against
3. Consult with the IRS bankruptcy division, and bankruptcy lawyer
4. File an ‘offer in compromise’, IRS Form and other required documents

IRS tax forms used in relation to bankruptcy


Extensive documentation is often required for bankruptcy filing as debtors, the bankruptcy court, and the IRS should all be made aware of the financial scenario the party filing for bankruptcy faces in order to determine, and asses payment or non-repayment of debt obligations. In terms of IRS debt, some of the forms and information used during bankruptcy proceedings include those mentioned below:

• IRS Form 656-Offer in compromise
• IRS Form 1040 (and related documents)
• Internal Revenue Bulletin (IRB) 2006-40
• IRS Publication 538: Offer in compromise information
• Information pertaining to reduced tax year filing during bankruptcy
• IRS Publication 908: Bankruptcy tax guide
• Bankruptcy Abuse Prevention And Consumer Protection Act of 2005: BAPCPA ACT: Title VII

Bankruptcy filing tips


Filing for bankruptcy involves bankruptcy law, US Statutory law and dynamic individual financial situations. For this reason not seeking professional assistance is generally not a good idea. There are many legal requirements, options and stipulations that if not abided by, may disqualify, hamper or reduce the potential tax advantages of filing for bankruptcy. Hence, the following tips are not guaranteed to be completely accurate due to the complexity of tax law, and are just a few of the several things to consider when dealing with taxes due to the IRS when filing for bankruptcy.

• File taxes regardless of bankruptcy. Not doing so can complicate or disqualify the bankruptcy.

• For a chapter 7 bankruptcy, File an IRS Form 1040 shortly after the bankruptcy case begins. This can minimize the amount of tax due under Section 1398 of Title 26 of the US Code. IRS Publication 538 has more information on this.

• Utilize all legal bankruptcy related tax deductions, reduction techniques and options to minimize non-qualifying tax debt. For example deduct bankruptcy lawyer fees in Schedule A of bankruptcy tax year.

• Signing over of real estate that had equity value prior to bankruptcy filing to an offshore trust may protect the equity in the property from tax liens if in compliance with U.S. Code statutory law.

• Some taxes from tax years prior to filing for bankruptcy may still be claimed by the IRS

• For unanswered questions or concerns contact the IRS Taxpayer Advocate Service at 1-877-777-4778 and/or speak with a qualified tax professional.


Sources consulted:

1. http://www.moranlaw.net/taxfaq.htm (Moran Law Firm)
2. http://www.irs.gov/pub/irs-pdf/p908.pdf (Internal Revenue Service)
3. http://www.mckenzielaw.com/BANKRUPT.html (Mckenzie law firm)

Image license: DonkeyHotey, CC BY 2.0

2 comments:

  1. The IRS is kind enough to offer taxpayers several options for resolving unpaid taxes. The first is a basic installment plan. The tax debt installment plan allows you to repay your debts over a series of smaller payments, typically over a period of two to three years.

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  2. The TDS as per your Form 16 must tally with the figures in Form 26AS. If you file the return despite discrepancies, if any, you could get a notice from the I-T department later. NJ cpa

    ReplyDelete