Tax Debts and Bankruptcy

19.07.2010 | Author: chenxiaofeng | Posted in Finance

We all know that dealing with the IRS can cause stress. This is especially true for matters related to a tax debt and bankruptcy, and why it may be a good idea to seek the counsel of an IRS enrolled agent. When you are faced with a tax debt, there are possibilities of discharging it through a bankruptcy filing. However, not all tax debts can be discharged. Under current statutes, income tax debts are generally dis-chargeable in a Chapter 7 or Chapter 13 filing if all these conditions are fulfilled:

  • At least 3 years have passed since the tax became due
  • The IRS assesses your tax debts more than 240 days before you file for bankruptcy along with any extension due to an offer in compromise (OIC).
  • You file your 1040 tax return more than 2 years prior to declaring bankruptcy
  • You did not attempt to defraud your tax details or provide inaccurate information in any manner whatsoever
  • You did not attempt to evade taxes in any manner whatsoever

    • Which Taxes are Not Dischargeable?

    Some taxes are not dis-chargeable under bankruptcy. These are:

  • Trust fund taxes, taxes for which no return was filed or taxes that were filed late within two years before the bankruptcy.
  • Taxes associated with tax evasion or a fraudulent return
  • Taxes that were evaluated within 8 months prior to the bankruptcy being filed
  • Taxes for one year ending before the bankruptcy, in which the return for the year was due within three years prior to the bankruptcy filing.

    • How Does Bankruptcy Impact Tax Debts?

    Bankruptcy is a serious financial condition. It has long-term negative impacts on your financial status and credit history. You may emerge out of bankruptcy after a certain period of time. Yet, you face tax debts. The IRS has been given leverage by the law to collect the debts they are owed in proportion to your bankruptcy. According to the statute of limitations, the time for the payment of your debts is extended for the term your bankruptcy was pending plus 180 days.

    A bankruptcy filing remains on your financial history for a period of 10 years. This can make it extremely difficult for you to obtain credit. You are rendered as a risky proposition by lenders who may not extend you the credit you desire. You will find it extremely difficult to buy a car or even rent a house. You may need to pay higher insurance premiums.

    One option is to work out a plan with the IRS authorities to repay your debts over time. On the other hand, if you feel that you cannot pay your substantial debts over a period of time, bankruptcy may be a good option. For matters such as this, it is advisable to enlist the services of a certified public accountant or a tax attorney to tell you what is the right thing to do and what to avoid. A tax resolution specialist who has passed the IRS enrolled agent exam might not be a bad idea under such circumstances. The IRS enrolled agent test is administered in the form of three exams by Prometric. Each exam is three and one-half hours long, with one exam focused specifically on representation matters. There are several IRS enrolled agent courses which cover the material on the exam

    Tax debts that result from unfiled tax returns are not dis-chargeable. The IRS routinely assesses taxes on un-filed returns. You cannot discharge these liabilities until you file a tax return for the tax year in question.

    Other Options for Dealing With Tax Debts

    A good enrolled agent may be able to help you negotiate an alternative arrangement with the tax authorities, so that you can pay off your debts without resorting to bankruptcy. Some of these alternatives include

  • Installment Plans
  • Partial Payment Installment Plan
  • Offer in Compromise
  • Currently not Collectible (CNC)

    • IRS Circular 230 Disclosure – Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

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