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5 Tax Implications of Filing Bankruptcy

master — Fri, 19 Dec 2014 18:45:41 +0000

5 Tax Implications of Filing Bankruptcy master Fri, 12/19/2014 - 13:45

They say the only inevitable things in life are death and taxes. Nearly everything in life has some sort of tax consequences – marriage, divorce, jobs, charitable donations, having kids, going to college, buying a car, even putting gas in that car – everything. Whether it's income tax, sales tax, use tax, life is a never ending cycle of taxes. So it should be no surprise that bankruptcy also comes with certain tax implications as well.

Discharged debt won't increase income taxes
Outside of bankruptcy, if a creditor writes off all or part of a debt, they will usually issue a 1099-C. This converts the forgiven or written off debt into taxable income. It may not make sense for debt to become income, but it's the law. The idea is that by not paying that debt, you have additional income freed up. This is known as implied income.
But any debt discharged as part of a bankruptcy will not trigger a 1099-C or additional income taxes. However, some creditors may issue a 1099-C even if your debt was covered in the bankruptcy. Also, if you were issued a 1099-C for a written off debt and then subsequently filed bankruptcy and included that debt, you may be able to negate the 1099-C by raising your bankruptcy as a defense.

Bankruptcy may cause some income taxes to be discharged
If you have back income taxes, bankruptcy may provide a tax relief, as well as a debt relief, solution. Depending on the circumstances, some unpaid income taxes can be written off. The first consideration is that you must have filed your income tax returns on time, even though you couldn't pay them. If you don't file, the IRS will file returns on your behalf.
Amounts owed on these substitute returns are not eligible for bankruptcy discharge. But tax debts on timely filed returns that are three years old or longer will likely be eligible for relief. The timing of your bankruptcy is very important if you have outstanding tax debts. Consult a reputable North Carolina bankruptcy attorney to discuss the best time to file to maximize this tax benefit.

Other tax debts may not be eligible for discharge no matter what
If you owned a business or had employees, certain business taxes will not be eligible for bankruptcy discharge no matter what. Payroll taxes including those you withheld from payroll as well as employer payroll taxes such as FICA are not eligible for discharge and will survive the bankruptcy filing. Sales taxes collected from customers are also not eligible for relief or discharge.

Consult a bankruptcy attorney and a CPA if you have serious tax issues
If you owe back taxes and are overwhelmed by debt, it may be wise to consult a tax professional or CPA, along with a bankruptcy attorney, to be sure you get the best possible debt relief including discharge of income taxes to the maximum allowed by law. These two professionals working together will get you the best results, particularly if you owned a business or have very complex taxes.

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When Can You Get Back Income Taxes Written Off in Bankruptcy and When Are They Unavoidable?

master — Tue, 26 Aug 2014 18:04:12 +0000

When Can You Get Back Income Taxes Written Off in Bankruptcy and When Are They Unavoidable? master Tue, 08/26/2014 - 14:04

Income taxes are a type of debt and, if they go unpaid, can be the most difficult type of debt to get out from under besides student loans. There are only a couple of ways to get out of paying tax debt – wait out the government's typical collection period or request that they be discharged in bankruptcy. Back taxes alone aren't a good reason to file bankruptcy, but if you have other unsecured debts like medical bills and credit card debt that are piled up, past due and that you don't have the means to repay, it's definitely something to consider.

Here are the circumstances under which you can typically have back tax debts forgiven in bankruptcy:
#1 The taxes must have been due more than three years ago. So, for a bankruptcy filed in 2014, only taxes due in 2011 and prior will be eligible for discharge.
#2 The taxes must have been filed pretty much on time. If you couldn't file on time and filed an extension, then filed your taxes within the period granted by the extension, that should be okay.
#3 The taxes must have been assessed at least 240 days prior to the filing. Taxes are usually assessed right after the returns are received, so this shouldn't be a problem.
#4 The taxes must have been assessed on returns you filed, not returns the IRS filed on your behalf because you failed to file tax returns (called substitute returns).
#5 The tax returns were not filed falsely or with intent to evade taxes or to defraud the government. Simply being unable to pay your tax debts is not evidence of fraud by itself.
#6 The taxes must be federal or state taxes, not property taxes, withholding taxes, sales taxes, FICA, excise taxes or other non-income taxes.
To find out which, if any, back taxes can be discharged, you first need to get a tax transcript – click here to get yours. If you owe back taxes other than income taxes, Chapter 13 can give you time to pay them over the three to five years of your repayment plan. If you file Chapter 7 and have significant assets, the IRS or other tax agency that you owe will expect you to liquidate assets to satisfy tax debts that are considered “priority tax debts.”
Under Chapter 13, your back income taxes can become part of your repayment plan, and any available disposable income can be put toward these. At the end of the repayment plan, if you have any remaining balances that fit criteria one through six above, remaining balances may be discharged. Under a Chapter 7 plan, taxes that fit criteria one through six above may be dischargeable along with your other unsecured debts.

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Bankruptcy and Taxes - 3 Ways to Deal with Back Tax Debts

master — Wed, 23 Apr 2014 18:23:58 +0000

Bankruptcy and Taxes - 3 Ways to Deal with Back Tax Debts master Wed, 04/23/2014 - 14:23

Owing back taxes is not a reason by itself to consider filing bankruptcy. But if you've got a mountain of other debts that you simply can't service, filing bankruptcy may make sense, and attempting to get back tax debts discharged makes even more sense. But not every income tax debt is dischargeable. If not, there are a couple of other options to deal with them. Today we look at income taxes in bankruptcy as well as Offers In Compromise and Installment Plans. The bottom line is that the IRS wants what they believe you owe. Even if you don't like income taxes or feel they're excessive, they are an unfortunate fact of life. And if you can't pay what you owe, you'll soon find out that the IRS can be an unrelenting debt collector. That being said, they are more manageable in many ways than other debt collectors and will work with you when you simply don't have the money to pay.

#1 Installment Payments
If you file your taxes and find you owe a tax bill you can't pay, installments are a great option to deal with your debt. Even if you can't write the IRS a check, you can work out a payment plan. You don't even have to face the intimidating task of talking to an agent – you can apply online and get an instant response. If you are turned down by the automated system, you can call in and talk to an agent and make an argument for why you should be allowed to pay over time. Installment plans are set up for the full amount plus any relevant interest and fees.

#2 Offer in Compromise
If you can't afford to pay all of what you owe, even over time, your next best option is requesting an Offer in Compromise. The IRS may approve you for an OIC if you can prove that you can't afford to pay all of what you owe or that if you are forced to pay, it will create a financial hardship. An OIC allows you to pay just a portion of what you owe based on your income, expenses, equity in assets and assets wholly owned. The IRS will usually accept an OIC that they feel is the absolute maximum they can get out of you based on your ability to pay. You can pay an OIC in a lump sum or over time depending on what the IRS allows.

#3 Bankruptcy
In some cases, bankruptcy can either help you discharge your debt or help you negotiate an OIC or Installment Plan because it demonstrates that you have an inability to pay. There are some limits on income taxes discharged in Chapter 7 or 13. Tax debts that can't be discharged include those for returns you didn't file and that the IRS filed on your behalf, those for returns filed late and within two years of your bankruptcy petition filing and for any taxes you attempted to evade or cheat. This is a complicated area of both tax and bankruptcy law and should be discussed with a reputable North Carolina bankruptcy attorney.
Remember, you should always file your tax returns on time even if you don't have the money to pay the tax bill. This is for two reasons. First, if you don't, the IRS will file a return on your behalf – called a substitute return – and it will be a return that maximizes your taxes, includes only the bare minimum deductions and is not to your advantage in any way. They will also assess a penalty for you failing to file and will begin racking up interest on the high tax bill they created on your behalf.
Second, the IRS will only pursue a back tax debt for 10 years. Even if you can't afford to pay, filing your tax return starts the collection clock ticking. If you can't afford to pay, pursuing one of the options above should help you get out of your predicament, but no matter what, you want to start chipping away at the decade they have to chase you down for those back taxes.
To find out how Chapter 7 or 13 bankruptcy can help you get relief from your debts including past-due income taxes, contact the law offices of John T Orcutt for a free consultation today.

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