Thursday, 12 July 2012

Does Bankruptcy Erase Tax Debt

If you're struggling to make ends meet and dodging bill collectors, the last thing you want to worry about is a visit from the tax man looking for back taxes. Although bankruptcy can be used at times to discharge personal taxes, this tactic is not always completely effective. Other types of taxes beyond income taxes are exempt from discharge in bankruptcy, so a tax debt may not be wiped out by bankruptcy proceedings.

- Automatic Stay

Once an individual or corporate entity files for bankruptcy, the court issues an automatic stay of debt. This order temporarily prevents all creditors, including the Internal Revenue Service, from collecting debts during bankruptcy proceedings. The IRS may petition the court to lift the stay to collect back taxes, although it will generally need to prove the taxpayer engaged in fraudulent activity to remove the stay. During the time the automatic stay is in effect, the IRS will not be able to attempt to collect taxes, regardless of the type of tax debt owed.

- Requirements for Discharge

Back taxes aren't immediately erased when a taxpayer files bankruptcy. To qualify for discharge, the tax debt must be at least three years old at the time bankruptcy is filed, the taxpayer must have filed a return at least two years before filing and the taxpayer cannot have been shown to have made a willful attempt to evade taxes or defraud the IRS. Additionally, only income tax debts may be discharged by bankruptcy. Payroll taxes and fraud penalties may not be discharged by bankruptcy proceedings.

- Chapter 7

In Chapter 7 bankruptcy, an individual or corporation's assets are liquidated by a trustee and the proceeds are used to pay off creditors. If the IRS filed a tax lien against a taxpayer before the bankruptcy filing, the tax debt will not be discharged in filing. If the taxpayer emerges from Chapter 7 with property remaining, the lien is reduced to match the value of property. For example, if the IRS filed a $15,000 tax lien against a taxpayer, and the taxpayer emerges from Chapter 7 with $8,000 in assets, the lien amount is adjusted to $8,000.

- Chapter 13

Taxpayers who enter Chapter 13 bankruptcy renegotiate their debt amount with their creditors in the process. In these proceedings, debt amounts, including property taxes, are reduced as the court develops a payment plan to help a debtor emerge from bankruptcy. In these cases, if a judge decides the taxpayer only has the ability to pay $8,000 on $15,000 of back taxes, the amount will be adjusted as part of the payment plan developed as part of Chapter 13 filings. As with Chapter 7, tax liens aren't discharged by Chapter 13 protections.

- Chapter 11

Although it's rarely used by individuals and favored by corporations, taxpayers who file Chapter 11 receive a six-year grace period to repay tax debt. During this period, interest on the unpaid balance accrues.


Bankruptcy and Tax Debt

Taxes can be a tricky subject and many people simply ignore them most of the year and only pay attention come tax time. Although no one sets out to owe the IRS money, it does happen to many people. Tax debts are particularly difficult to manage, especially if you are experiencing financial trouble or are considering filing for bankruptcy.

While most people assume tax debts are not dischargeable in bankruptcy, the fact is that some are eligible for bankruptcy help. The general rule of thumb is that payroll taxes, trust fund taxes, tax penalty fees, and taxes that are accumulated due to fraud are not eligible for bankruptcy. However, income taxes can be managed in bankruptcy in most cases.

Qualification Standards

There are several rules and conditions that apply when considering whether a debt will qualify for bankruptcy discharge. The specific criteria set by the bankruptcy code defines which debts will be eligible. First, the taxes must be tied to a current and filed tax return. Any tax debts that have not been filed with the IRS will not qualify for discharge. The taxes must have been assessed by the IRS at least 240 days before the bankruptcy filing. Next, the debts must be at least three years old. Finally, the taxes must not be considered to be fraudulent or have any attempt to evade payment.

Bankruptcy Cases

While tax debts can be discharged under either a Chapter 7 or Chapter 13 case, a debtor's income will better determine which case they qualify to file. Whenever possible, debtor's are encouraged to repay their debts under structured payment plan through Chapter 13. However, if a debtor cannot afford to repay their total tax debt liability, they may be able to have some or all of the debts eliminated through Chapter 7.

Other Options

Managing tax debts outside of bankruptcy is highly encouraged. Luckily, the IRS offers taxpayers two ways to resolve their tax debts directly. The IRS installment plan allows for the taxpayer to repay their liabilities over a series of small increments. Generally, this plan breaks down payments over the course of two to three years. Requesting an installment plan is fairly simple and most people are pleasantly surprised to learn the IRS is willing to negotiate. A tax debt settlement option is also available for those who cannot afford to repay in full. An Offer In Compromise is a proposed settlement that is presented to the IRS, in which they agree to accept less than the full amount owed. This program is harder to come by and is generally reserved for those with serious financial hardships.

For more information please visit The Lee Law Firm aims to help local residents resolve their debt issues and achieve a financially healthy future. They provide high quality legal representation that helps lower monthly debt payments, stop wage garnishment, prevent foreclosures and repossessions, and stop calls from creditors. The Lee Law Firm bankruptcy lawyer in Fort Worth have many years of experience in all aspects of Chapter 7 and Chapter 13 Bankruptcy.

Wednesday, 11 July 2012

Does Bankruptcy Cover Tax Debt

Does Bankruptcy Cover Tax Debt ?

The Internal Revenue Service is the federal government's taxing authority. The IRS assesses, collects, monitors and audits every United States resident's federal income taxes. When Congress enacted the Bankruptcy Code, it made sure to protect the government by prohibiting debtors from getting rid of their income tax debt with some exceptions.

Bankruptcy Discharge

Bankruptcy discharges an individual's liability to repay debts. A Chapter 7 case usually results in a discharge without the debtor paying anything back; a Chapter 13 case requires repayment of some debts and partial repayment of others. The discharge applies only to unsecured debts, which are debts that are not backed by property. Credit cards and medical bills are unsecured debts. Some unsecured debts, however, are nondischargeable, including certain income taxes.

Nondischargeable Debts

Section 523 of the Bankruptcy Code lists a variety of debts that you cannot discharge. The list includes child support, alimony, student loans and most income taxes. In a Chapter 7 case, nondischargeable debts survive the bankruptcy and you must continue to repay them after the case is over. In a Chapter 13 case, you must pay most nondischargeable debts in full unless the court approves special arrangements.

Nondischargeable Income Taxes

If you owe the IRS for income taxes that the IRS assessed within the past three years, you cannot discharge the taxes. You also cannot discharge income taxes that the IRS assessed on a late-filed tax return. For example, if you filed your 2003 tax return in 2007, any taxes are nondischargeable, no matter when you file bankruptcy. Similarly, if you filed your 2006 tax return on time and the IRS assessed taxes in 2007, the taxes are nondischargeable through 2010. If you filed your 2006 tax return on time but the IRS did not assess taxes until 2009, the taxes are nondischargeable through 2012. A Chapter 7 discharge will not get rid of these taxes, and you must pay these taxes in full with interest in a Chapter 13.

Dischargeable Income Taxes

You can discharge certain federal income taxes. If the IRS assessed your taxes more than three years ago and you filed your tax return on time, you can discharge the taxes in Chapter 7 and you can treat the taxes as general unsecured debts in Chapter 13. For example, if you filed your 2001 tax return on time and the IRS assessed taxes in 2002, you can discharge those taxes in a 2011 bankruptcy.


Tax Debt Bankruptcy

Discharging Back Tax Debt In Bankruptcy

If you are filing for bankruptcy, and you owe the IRS back taxes, you may be eligible to have the tax debt discharged. Many people believe that a bankruptcy filing does not absolve the tax debt owed, and the IRS does not advertise this, but many IRS taxes, penalties and accrued interest do qualify for complete discharge in bankruptcy.

For those who do qualify, there are three general rules that must be met:

Rule 1: The tax liability must be three years old or older from the "due date" of the return, including extensions.

Rule 2: The tax returns themselves had to have been filed at least 24 months before the petition for bankruptcy date.

Rule 3: 240 days must pass from the date of assessment.

Not all people will qualify for this, and it is recommended that you seek the advice of a tax professional who can study your case and help determine if your IRS debt can be discharged. Not all bankruptcy attorneys understand whether the consumer's income tax liabilities qualify and this is where the advise of a tax expert is key. Expert representation can greatly improve your chances of having your IRS taxes, penalties and interest successfully discharged. In addition to this, Congress has enacted a new Consumer Bankruptcy law (in 2005) that included many changes. A tax expert will be up-to-date on these changes, some of which affect the ability to discharge income taxes.

Even if you do not qualify for a complete discharge of your IRS tax debt, there may be other viable options for reducing the tax obligation such as the IRS Offer in Compromise program or the IRS Installment Agreement.

The Offer in Compromise (OIC) program was established by Congress to help taxpayers get a fresh start, if they qualify. In qualifying cases, when the Offer in Compromise is accepted by the IRS, all federal tax liens can be released and the negotiated settlement amount is paid. It should be noted that the Offer in Compromise program is a privilege and is a very subjective process where the IRS has the final word. It can be a very long and complicated process too.

The IRS Installment Agreement is where the expert tax representation negotiates with the IRS a payment plan to pay back taxes. To qualify for such a plan, the consumer must have filed all tax returns, be willing to disclose assets owned including cash and bank accounts, must not have the capacity to borrow the amount owed to the IRS from other sources (a second mortgage on the home, for example), must not have adequate equity in a retirement account which can be borrowed or liquidated and must complete a personal financial statement.

For those consumers who are facing bankruptcy, or just struggling to pay off back tax debt, the IRS has provided some good options. For more information you can visit Seeking expert tax help is the best resource for finding which one works best for a consumer's situation.

Debt Settlement Income Tax

FAQ About Debt Settlement Taxation

New regulations about debt settlement taxation has triggered off several questions about debt settlement and income taxes. This article tries to cover the most important aspects of the same within its limited scope. Let us start off by explaining why settlement is taxable. This is because of the fact that once you go for settlement, you need to pay a certain amount of money to the creditor. This is the money that you save and it is considered as your income. Now, income being taxable, settlement becomes taxable. Hence, you need to pay taxes.

Question: Who informs the IRS about the settlement deal?

Answer: After the new regulations were implemented, the creditors are required to inform debt settlement deals to the IRS. The creditors issue 1099-C to the IRS which reports the details of the settlement deals taking place.

Question: What is 1099-C and what does IRS do with it?

Answer: 1099-C is the details of the debt settlement deals that the creditors agree to. It includes the information like customer name, forgiven debt etc. After IRS receives this from the creditor, it will forward the same to the debtor. The debtor will then have to account for the same in the IT return. If the debtor fails to do so, the IRS will file Federal Tax Lien and take steps against the debtor in form of penalties and interests.

Question: Can settlement taxation be avoided?

Answer: Yes, it can be avoided under various situations. In case the debtor can prove insolvency during settlement, it becomes non-taxable. The forgiven debt is non-taxable if the debtors indebtedness is due to any loss in a real property business or if the forgiveness was an outcome of a bankruptcy proceeding. Also, if the forgiveness is considered as a gift, the debt settlement taxation can be avoided.

Question: How to report insolvency to the IRS?

Answer: By filling the form 982: Reduction of Tax Attributes Due to Discharge of Indebtedness issued by IRS along with tax return. The debtor can also alternately attach a letter with the detailed calculation of the total debts and the total assets during settlement along with the tax return.

Question: Is there any specific amount of forgiven debt that is taxable or any amount forgiven is taxable?

Answer: If the forgiven debt amount is greater than $600, it becomes taxable!

For consumers with over $10k in unsecured debt, debt settlement can be a legitimate way to eliminate a significant amount of that. To find a legitimate company it would be wise to visit a free debt relief network. They will provide free help and point consumers in the right direction whether it is debt settlement or another option.