patrick armstrong Athens | Bankruptcy and Taxes
Eliminating
Tax Debts in Bankruptcy
Bankruptcy
and taxes settle still
remain a hot debate issue in tax advisory circles especially on whether filing
bankruptcy can be a ground for withdrawing liens and IRS “forgiveness.” Different bankruptcy
and taxes laws give contradicting picture on what should happen when a tax
payer files for bankruptcy amidst an outstanding tax debt. There should be a
clear law outlining the relationship between bankruptcy and taxes to avoid further debates among lawyers and IRS
experts. However according to the
provisions of Internal Revenue Code in the bankruptcy
and taxes section, filing for bankruptcy does not absolve the taxpayer from
liens on his property or business. So where is the meeting point?
What are my
options after filing for bankruptcy?
There are number of options available for a
person that has filed for bankruptcy to be shielded from tax debts. Bankruptcy
incapacitates the ability of the IRS in collecting tax dues whether in form of
accessing bank accounts and wages. Although it may make collection difficult,
it does not force IRS to remove lien on your property and assets. However, in
some instances, IRS may be forced to release the lien because it has no value.
With a release of lien, it means that the agency may fail to recover the debt
but continues to hurt the credit score of the taxpayer and his name remains
listed as a defaulter by credit agencies. This rating can only expire after
about 10 years.
Chapter 7 however, has significant provisions
that can be used to your advantage to eliminate debt without repaying, as
well as the IRS, and give your finances a new lease of life. In addition to the
provisions of the chapter, bankruptcy can afford the taxpayer access to other
services such as offer in compromise and tax payment arrangements. Usually IRS
does not grant offer in compromise unless where the taxpayer has satisfied the
stringent provisions.
Qualifying
for Discharge
Tax experts and attorneys have devised a way
of working around the bankruptcy law to allow taxpayers to discharge taxes
after bankruptcy. However, whether a debtor can discharge tax debt depends on
the nature of tax, the period of tax debt (years of accumulation), whether the
taxpayer had filed returns and the nature of bankruptcy. Chapter 7 (Federal
income taxes) are dischargeable subject to a number of conditions. The
discharge must be for income taxes, there exists legitimate tax returns and tax
liability that is older than three years, the taxpayer satisfies the 240-day
rule and that no tax evasion or fraud was attempted by the taxpayer. Penalties on taxes that are dischargeable are
also eligible for discharge. After the discharge of tax liability, a debtor is
no longer responsible for paying the taxes and the IRS may not garnish a
debtor's wages or bank accounts.
The impact of Chapter 7 on Taxes
Taxes
due can be eliminated as provided in Chapter 7 subject to satisfying a number
of requirements. To begin with, before accumulation of the debt you must have
constituently filed tax returns. Do not rely on substitute for returns filed by
IRS to bail you out of the dilemma. First of all, for special provisions of bankruptcy and taxes to take effect,
you must have filed returns 2 years before the date of bankruptcy. Also, your
returns must have been due for filing 3 years prior to the bankruptcy. IRS must
have indicated your outstanding taxes on their books about 240 days before you
filed for bankruptcy. The amount outstanding in your taxes must be in form of
income taxes because trust fund taxes cannot be eliminated under the provisions
of Chapter 7. Ensure that there is no fraud attached to your tax returns. Taxes
outstanding from fraud cannot be absolved in bankruptcy.
The
relationship between bankruptcy and
taxes is a question of timing and not legal provisions. Your ability to use
bankruptcy to eliminate taxes is an issue of timing – when the returns were
filed and when bankruptcy has been filed. For instance, you should file for
bankruptcy when your taxes are old enough to gain eligibility for discharge. During
bankruptcy cases, taxes get a privileged consideration compared to other forms of
debts such as credit cards that do not receive any priority. Today, you can
file for bankruptcy and eliminate credit cards almost on the same day. However,
bankruptcy and taxes remain a big
issue because taxes are a debt to the government and requires an elaborate
planning and footwork.
Federal Tax
Liens
Despite of the great
relief that chapter 7 delivers to a taxpayer through discharge of debt, if the
IRS had put a lien on the defaulter’s property before the filing of the bankruptcy
and taxes it will still hold after the discharge. It is therefore advisable
to clear the identity
by paying off the lien before disposing the property.
Tax Debt Not
Eligible for Discharge
Not all types of
debts are eligible for discharge under Chapter 7 bankruptcy. Some of the debts
include tax fines from tax debt that is disqualified for discharge, tax debts
from tax returns that have not been filed and taxes from trust funds or
withholding taxes in remission from an employee's pay check by the company.
Due
to the intricacy involved when connecting bankruptcy and taxes elimination, one
of the greatest advantages of leveraging on the provisions of Chapter 7 is that
you are relying on timing issues and bankruptcy law. This is contrary to the
other options where you are under the mercy of IRS to give you a fresh start
from its programs such as offer in compromise. You should also consider that
the offer in compromise can take up to even a year to be reviewed and get
approval by IRS. On the other hand, Chapter 7 slashes the waiting by almost
half. Where the IRS filed a tax lien prior to your bankruptcy, they do not need
to necessarily lift it off once the bankruptcy is over.
If you are unable to settle your debt under
this bankruptcy and taxes trade off
as per Chapter 7, there are other arrangements to consider. You can enter into
an instalment agreement with the IRS as a payment plan to pay off the debt. You
can also make IRS an offer in compromise that will allow you to settle the debt
for less than the amount in arrears.
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