This is what “Tax” and “Bankruptcy” feel like!!
You got any better adjectives to describe them?? Well, I don't!
People file bankruptcy when their debts are not in a position to be paid off easily.
They want to get rid of those debts with one big blow and start everything fresh, that will mark a new beginning, a new life!
But the problem is with taxes. They are sticky and always counted as a liability.
Before I begin, I want to explain the two main types of taxes related to your property. This is important for you to know because rules are different and a bit complex if you have tax debts when compared to normal debts.
Any tax claim that is having a collateral attached to it, is a secured tax, which means, the government has the power to sell your property and reimburse for all the unpaid taxes attached to the property.
By real property, we mean properties that are not portable and can never be proved ‘nil value’ to avoid the taxes. Examples of real property are ‘Land’, ‘Forests’, ‘Vines’, ‘Ponds’, ‘Buildings’, and anything that can’t be denied of its existence!
Now the crucial part is, as it sounds, these secured taxes are priority taxes and therefore difficult to get discharged in a bankruptcy, regardless of what chapter is filed!
Taxes associated with a personal property and that has no collateral attached to it are unsecured debts.
Even though unsecured debts are priority debts, still there are big chances to get them discharged.
Examples of personal property are “Automobiles”, ‘Boats, Jets, and other water vehicles’, ‘aircrafts’, ‘furniture for office and businesses’, ‘RVs or mobile homes’, etc. But intangible personal properties like shares, stocks, bonds, records, software, etc. are exempted!
The big bonus for unsecured personal property debts is that, if the time limit for a tax payable without penalty has passed, then these debts might be dischargeable!
Always remember that Bankruptcy is a secondary option, whenever it comes to debt relief.
There are always other methods to wipe tax debts when compared to all the downsides of bankruptcy.
Be sure to check them out if you are giving bankruptcy a second thought.
Else carry on with this post.
1. Being a debtor you must file all the tax returns, be it federal or state, that becomes due after you file bankruptcy. If you don’t do so, then as per law your bankruptcy case can be dismissed or transferred to another bankruptcy chapter, as found suitable by the court and IRS.
Once the taxing authority (IRS) has requested the court to dismiss or change the bankruptcy case, there are high chances your case will be dismissed, if you fail to file the required tax returns within 90 days of the request,
2. If you plan to file a chapter 13 bankruptcy, then you must also file all tax returns for tax periods falling under 4 years from the date of bankruptcy filing.
3. Your canceled or forgiven debts in the bankruptcy case won’t be counted as taxable income.
But If you don’t include your overall canceled debt as a result of bankruptcy, in your income, then you must use that debt amount to pay for certain tax attributes.
It is highly recommended to revise such attributes with your attorney and the bankruptcy court.
4. For couples, filing a bankruptcy under chapter 7 and 11, the bankruptcy estates for each of the partners will be treated as separate entities during taxation and for other tax purposes.
If you are a couple, then you will have to file two distinct bankruptcy estate income tax returns, on meeting the requirements.
Your attorney will help you out with such cases. You need not to worry about the procedures!
You will have to file your tax return as usual on Form 1040. Another tax return will be filed separately for your bankruptcy estate.
5. If you file bankruptcy under chapters 13 and 12, then your bankruptcy estate will not be treated as a separate entity.
You continue doing your tax filings as usual, after you file for bankruptcy, on the form 1040.
6. If you are filing a chapter 7 or 11 case, then you can elect for short tax years. Have a brief talk with your attorney to know more about such options. But you cannot make such a choice if you file a “no asset bankruptcy” or you have no non-exempt assets.
7. If you have any abandoned property, that was included in your bankruptcy estate, then disposal of such a property back to you, after the bankruptcy case evaluation ends, shall not be considered as a taxable income.
8. If you filed for a chapter 11 bankruptcy, then the bankruptcy estate can compensate any business or trade or source of income that you started before filing the bankruptcy. But you will have to showcase such items as miscellaneous income on your tax returns.
9. You can use your bankruptcy estate to compensate for your administrative expenses, like paying bankruptcy filing fees, attorney fees and so on.
Such expenses can be shown on your tax returns and will be counted as deductibles!
10. You or your trustee must file a tax return for your bankruptcy estate if it has a gross income that falls under tax brackets.
11. If you own a corporation, then your trustee, receiver, or assignee may apply for relief to the IRS from filing federal income tax returns in bankruptcy.
But to apply for such relief, your corporation must have closed all business transactions and has neither assets nor income for the specific tax year.
12. The counting of your total due tax for a tax year starts with you filing the form 1040 after bankruptcy.
For a corporation, the year begins with the filing of the form 1041.
13. If your bankruptcy imposes an automatic stay on you, then the automatic stay won’t be effective for:
But this doesn’t mean it will hamper your financial or legal standing during the automatic stay. The IRS might send notices but can’t sue you.
14. As you file for bankruptcy, the IRS will suspend the statute of limitations for your delinquent taxes till the automatic stay is active. Hence the automatic stay will not eat up the time for statute of limitation of your due taxes.
15. You can claim a refund for overpayment of taxes if you find fit during the assessment of your taxes in the bankruptcy period!
Along With, your trustee can totally speak at the court for the claim, and the trustee can also file the same claim on your behalf if you are unable to claim for the overpayment yourself.
16. The bankruptcy court has the power to determine the legality of any tax on you or your bankruptcy estate at any point of the case proceedings.
But the court does not have the power to determine the amount or legality of taxes that were imposed before the bankruptcy filing.
Hence your attorney or bankruptcy court cannot debate on your previous taxes.
17. The bankruptcy court also has the power to lift your automatic stay, and give an allowance to tax authority to continue tax proceedings if found suitable.
18. None of your assets can/will be levied by the tax authorities till the automatic stay is active.
But a motion of relief or a proof of claim might alter the scenario.
Therefore have a detailed talk and consultancy with your lawyers.
19. There are several income taxes, excise taxes, employment taxes and so on known as eighth priority taxes of the federal government.
Explaining such taxes is not possible in a concise article like this. Have a thorough revision with your attorney for a better understanding of these taxes, or take the pain and search it for yourself.
In chapter 7 bankruptcy, your assets can be liquidated to pay these eighth priority taxes after your other high priority secured debts and tax claims are paid.
A chapter 11 bankruptcy will search for suitable measures to payback these taxes.
With chapter 12 bankruptcy, you can do your payments on a deferred basis within a time limit set by the authorities.
Chapter 13 will give you enough time to think over your eighth priority tax payments. You will get a 3 years time to complete your total payment, or the limit can get extended.
For all such eighth priority taxes, consult your attorney for better repayment plans and extended time limits.
20. Penalties that are issued as a punishment and are not actually monetary in nature are prioritized as unsecured claims. Chances are they might get discharged in your bankruptcy.
21. Chapter 7 bankruptcy does not have the power to discharge all of your tax debts. It will depend on the court proceedings and the judgments which of your taxes will get discharged.
Whereas Chapter 13 and 12 bankruptcy will formulate a suitable repayment plan for clearing your taxes.
22. In chapter 7 bankruptcy the following taxes are usually not dischargeable:
Only individuals can get the allowance of tax debt discharge in a chapter 7 bankruptcy. Corporations and other businesses are not allowed to get their debts discharged.
23. Priority taxes must be paid in full in a chapter 13 bankruptcy. On your total completion of payments under the chapter 13 repayment plan, you might get a huge discharge on your overall debts.
But the following taxes are non-dischargeable in a chapter 13 bankruptcy:
The list is same as with non-dischargeable taxes in chapter 7 bankruptcy as discussed above with subpoints in point 22.
24. You might be granted a hardship discharge in a chapter 13 bankruptcy if you are unable to complete all your tax payments due to legit issues and reasons that are not your mistake.
25. Before filing the petition for bankruptcy if the IRS already filed a Notice of Federal Tax Lien then discharging your federal taxes will get highly difficult. The situation can even get so serious that only paying back your tax debts in full will help you to lift the liens.
You need to be very careful in planning your tax debts payments and bankruptcy. These are very sensitive cases. Try to get hold of best law firms and attorneys while dealing with bankruptcy, because you must know all the loopholes in tax dischargeability.
You can also consult our law group, refer to our website or call us at: 800 530 OVLG (6854) (Toll Free), anytime, 7 days a week, from 8:00 AM - 8:00 PM.