Tax FAQ's
What if I can't pay non dischargeable tax debt even over a five year
Chapter 13 plan?
Consider an offer in compromise to the IRS. The IRS can negotiate with
taxpayers (or non payers, as it were) to compromise tax claims based on
either doubtful liability (you really don't owe that
much tax) or doubtful collection (you don't have
resources to pay the tax you owe).
Click here for a good
article on offers and here
for the IRS's overview of the process. The IRS generally expects you to
pay to them whatever is excess over their view of what it should cost you to
live for 50 months or the remainder of the collection statute.
Check out the IRS standards for allowable housing
and living
expenses used in evaluating offers. (If you live in a high cost of
living area like the San Francisco Bay Area, you can read and weep, or laugh, as
you chose.)
Currently, the IRS is under mandate to alter its policy that it
wouldn't consider an offer in compromise while a bankruptcy is pending.
How this will develop is an ongoing saga.
Are there tax consequences if my property is foreclosed?
Foreclosure can trigger tax consequences to you, depending on the tax basis
of the property, whether the property is your residence, etc.
Know that the bankruptcy estate in a Chapter 7 and 11 is a separate,
tax paying entity distinct from the individual debtor: if the property is
property of the estate when the foreclosure takes place, the tax consequences
should fall to the estate, not the debtor. This quirk in the law can
present some planning possibilities in cases where loss of the property seems
inevitable: you may be able to prevent the further insult of having the
loss trigger taxes on money you didn't receive upon the transfer if the
foreclosure occurs after, rather than before, bankruptcy.
Get
good tax advice.
Does the IRS have to agree to my Chapter 13 plan?
The IRS is just another creditor in the Chapter 13. Its objections are
limited to the same grounds as any other creditor: lack of good faith;
lack of feasibility; best
interests of creditors . Our experience is that the IRS welcomes a
Chapter 13 filing since the priority taxes get paid in full with little
expenditure of time and energy by the IRS.
Is the debt discharged in bankruptcy "income" that has to be
reported on my income tax return?
No. Debts discharged in a case under Title 11 of the United States Code
(the Bankruptcy Code) are not "cancellation of debt income" on which
you can be taxed. That doesn't always deter creditors, some of whom issue
debtors a Form 1099-C, reporting the cancelled debt to the IRS as income.
If that happens, the debtor's remedy is to file IRS Form 982. Get
the form.
No, except for trust fund taxes: the amounts withheld from the wages of
employees and not paid over to the taxing authority. In general, officers
and directors of corporations, partners, and anyone with signature authority on
the employer's bank accounts may be held liable for that portion of the
business's tax liability. In some states, the sales tax collected by a
retailer is also a trust fund, for which officers and directors may be liable.
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More on trust fund taxes
in bankruptcy |
If the discharge in the Chapter 7 case eliminates the debtor's personal
liability for the tax year or years for which there is a lien, the lien survives
only as a charge on the equity in the property that the debtor owned at the
beginning of the case.
The lien, though not discharged, does not attach to assets that you acquire
after the case is filed.
Your choices after the discharge are
| pay the IRS the value of the equity in assets to which the lien
attached at the beginning of the case; |
| do nothing in the expectation that the IRS will not attempt to enforce a
lien, if the collateral is of little value or is exempt from levy by law;
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| file a Chapter 13 to pay the lien over time if it attaches to assets of
significant value. |
More on
Chapter 13.
Yes, one of the most useful aspects of bankruptcy is the power of the
bankruptcy court to decide disputes between the debtor and a creditor, even if
the creditor is the IRS. In general, the court in a no asset Chapter 7,
where there will be no payment on claims of creditors, has no interest in
resolving disputes about taxes that will survive the bankruptcy. But, in
Chapter 13, there is always a distribution to creditors and therefore there is a
real need for the court to decide disputed claims. The bankruptcy
court may be the quickest and cheapest way to get a fair determination about a
tax dispute.
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