The BBB Scam
Big Credentials Reason
Enrolled Agent Scam
Low Priced Company Scam
IRS Bankruptcy – The Truth About Bankruptcy And Your Tax Debt Liability
IRS Bankruptcy is a very confusing topic that is best explained by the people who have experience in dealing with the IRS special procedures division. I will try to help with some of the most common questions that come up regarding the bankruptcy code. Bankruptcy should not be used as a way to defend against a collection officer. Too often I have seen people file a Chapter 7 or Chapter 11 at the advice of their attorney, when they could have negotiated a settlement through the collections division of the IRS. They have set up various departments that will help you settle any problem you have with the collection officer. If a good representative knows what is fair treatment under the current guidelines of the collection division, then they should be able to get you a reasonable settlement without resorting to bankruptcy, or BK.
This area gets so abused that I have even seen corporations that are insolvent file a Chapter 7 (complete dissolution). If the corporation is insolvent, what are you trying to protect? There is a much better and less costly way to settle a tax debt owed by a corporation. In fact this is my best money saving service. I have saved many corporations from being shut down, and have created huge tax savings in the process.
If you owe money to the IRS and you do not want to pay it, or you do not want to pay what an offer in compromise will require you to pay, then a Chapter 7 bankruptcy may wipe out all; yes all of your taxes. If any years have been assessed over 3 years ago, then they may be discharged in a bankruptcy. There may be circumstances that extend the 3 years. An attorney can advise you on what taxes each bankruptcy can take care of. Many people think that a Chapter 13 bankruptcy (wage earner and small business non-corporation plan) will save them from all penalties and interest. They do not know that it will save them from all penalties and interest only if the bankruptcy petition is filed prior to the date the IRS files the lien for those years.
Under certain insolvency situations, your overall debt may not have to be paid back because by the end of the bankruptcy, some debt will remain unpaid. Do not confuse this with a discharge of penalties and interest. I have seen the IRS levy paychecks for the balance of debt that was not discharged in a bankruptcy. I have seen remaining balances reduced to a judgment, thereby extending the 10 year statute of limitations they have to collect a delinquent balance. It is important that you understand the difference between a discharge of lien verses a discharge of the debt itself. A good attorney, who deals frequently with IRS motivated bankruptcies, will be able to explain this to you. I have had many potential clients come in my office after a seizure by the IRS wondering why the bankruptcy did not erase all liabilities.
More often than not a bankruptcy will not solve your IRS problems the way most people believe it will. Another common problem is that all years, periods, etc. that should be listed as debt are not listed in the petition. Usually records of account are not pulled to verify this. The result is that while you think you are protected by the bankruptcy, the IRS is seizing your spouse’s paycheck to pay for the years or periods not covered by the bankruptcy. It gets worse… anyway… do not select an attorney based on the lowest price.
You need to discuss this with a professional that understands these rules and practices them frequently. Dozens of people have come to my office having gone through a bankruptcy only to realize that it cost them more money and reduced a lot less tax than they were led to believe.
Erase IRS Tax Debt Legally, With Bankruptcy
Pros of Bankruptcy Tax Relief
When you file for relief to settle or wipe out your delinquent taxes, their is an automatic stay of all collection action by the IRS
A Bankruptcy can be used in cases where the IRS won’t accept an Offer In Compromise.
You may be able to pay less interest when filing a chapter 13 bankruptcy.
That’s about it in my opinion. In all my years of practice, I’ve found that if you don’t need creditor protection, or don’t have a clear case of only owing taxes that are large and qualify for a full discharge in a chapter 7 Bankruptcy, then an Offer In Compromise will be your best way to take care of erasing tax debt and the liens and levies that go along with it.
Cons of Bankruptcy Tax Relief
Bankruptcy will hurt your credit worse then you have hurt it already!
Not all taxes are dischargeable. An IRS Offer will cancel all IRS liabilities.
Attorneys fees are very expensive. You may see a small advertised price. What you may not be told is that you will pay the rest of the fees through the bankruptcy. Always get an analysis of the TOTAL COST for the 10% or whatever the trustee gets, plus the additional fees the lawyer gets, when claiming bankruptcy. An Offer In Compromise will almost always cost less in professional fees.
You may be close to a full discharge based on the “statute of limitations” on collections.
Bankruptcy Tax Guide – IRS Publication 908
Please download this from the IRS Website at www.irs.gov. It contains a lot of valuable information for individuals, corporations, partnerships, estates, etc. Who are owing back taxes and are considering an IRS bankruptcy. The bankruptcy tax guide also lists other IRS publications to assist with your IRS bankruptcy. There are tax codes that address corporate dissolutions and insolvencys that have to be addressed. Pub 908 gives you samples of filled out adjusted for tax effects of bankruptcy, forms.
How much tax relief can I get with chapter 7, 11, 13, 15 bankruptcy?
Various factors enter into calculating what federal taxes can be discharged. Factors such as the type of tax, how old it is, if the return the tax comes from was filed, if it was considered fraudulent, and the type of bankruptcy you file. Bankruptcy code administration can be complicated.
Filing Chapter 7 Bankruptcy
Mostly for individuals, or couples wanting to erase personal debt. But businesses can use too. This choice gives you time to liquidate your assets to fully settle your debts. Many debts are fully dischargeable in a complete dissolution. Liabilities such as payroll trust fund (withholding & social security) tax, spousal support, child support, are not wiped out, or forgiven.
You must file all applicable federal, state, and local tax returns, including those that become due after the bankruptcy case starts. Failure to file properly may cause the petition to be converted to another chapter, or dismissed. Do not default your bankruptcy.
The bankruptcy is treated as a new taxable entity, separate from the individual taxpayer.
A trustee is appointed to administer the estate and liquidate any non exempt assets.
Filing Chapter 11 Bankruptcy
This is a type of reorganization for businesses. The business stays open an operates while it makes provisions for repaying its debts.
You must file all returns as stated above in a chapter 7.
The bankruptcy is treated as a new taxable entity. This entity is separate from the individual taxpayer.
No trustee usually, the debtor remains in control (debtor-in-possession) and acts as the bankruptcy trustee.
Filing Chapter 12 Bankruptcy
This is for family farmers and fishermen. They need their own means of protection.
Filing Chapter 13 Bankruptcy
Commonly called a reorganization. Used for individuals and businesses. Usually you are given three to five years to fully pay off your debts. It gives you breathing room while you catch up on paying off debts.
Same tax filing situation as chapter 7, chapter 11, and chapter 12. the bankruptcy judge will kick out your bankruptcy for not filing.
Filing Chapter 15 Bankruptcy
This is for foreign debt you want to end or settle.
How does the IRS handle bankruptcy cases? The rules of bankruptcy.
First, all collection stops for the collection division. The case is sent to the bankruptcy division, (legal council). Only your bankruptcy attorney can deal with the IRS for the tax periods you owe that is listed in the bankruptcy petition. Periods owed not listed are not protected! I have had many people complain to me that their bankruptcy attorney is not protecting them from IRS collections. When I looked into the matter, I discovered that many bankruptcy attorneys do not pull IRS records of account for all delinquent tax periods. They rely on the IRS listing the periods in their “proof of claim”. In the past I have seen the IRS leave out various periods and then that collection action, such as bank and wage levies to satisfy those liabilities! Yes they can do this! Anyone filing a bankruptcy needs a lawyer who is well versed in IRS procedures.
Does bankruptcy against the IRS wipe out interest and penalties?
Indirectly yes. A Chapter 13 Bankruptcy for example that lasts a short period of time and then erases the balance of taxes owed, will cause you to pay less then what you would have paid with all the penalties and interest added. Taxes discharged in a chapter 7 will include all applicable interest and penalties. Once the petition is filed, interest stops accruing on the periods included in the petition.
Some attorneys tell their clients that it is all wiped out rather than explaining the rules. This causes people to be misinformed, and very disappointed when they see IRS judgements filed to secure the remaining balance of taxes owed, once the bankruptcy is over! A common statement I hear from people who still have tax problems after bankruptcy is “I thought the bankruptcy was supposed to remove all the taxes”.
How are discharged taxes treated for tax purposes on my return?
Any tax debt canceled from a bankruptcy is not income to the taxpayer. But, the canceled debt reduces other tax benefits to which the debtor would otherwise be entitled. Any creditors who elect to cancel their debt, instead of fighting it in bankruptcy, can cause it to become taxable to you. If it is over 0, they may file a Form 1099-C. Usually the full amount canceled becomes income.
Exceptions – certain student loans, if the debt would have been deductible if paid, reduction of debt by the seller of property if the debt arose from the purchase of the property. For more information please read the Pub 908 – Bankruptcy Tax Guide on clearing your tax debt.
If you have a local Houston IRS bankruptcy problem, or anywhere else in the US, contact us.
- If you are considering hiring us, call Joe Mastriano, CPA 713-774-4467.
- Think your IRS matter is handled? Think again!
- For your analysis, click here to email me.
Information on various common terms and areas of representation: