Bankruptcy and Taxes: How They Go Together

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The terms taxes and bankruptcy are among the most complex issues that ordinary people would rather leave to the professionals who are trained to handle such matters. Some people do not even want to think about or have a discussion about these topics.

However, if you are having issues with any of them, it is necessary you understand the intricate relationship between the two so that you will have an idea about what you are dealing with.

There are several factors that influence the association between bankruptcy and taxes. For example, the law surrounding bankruptcy allows taxes that are being owed to be wiped out in certain specific circumstances. In such a situation, it will no longer be the civic duty of the debtor to be responsible for repaying such debt and their income will not be affected.

After filing for bankruptcy, the discharge of a tax is dependent on the type of bankruptcy being claimed as well as the type of taxes you want discharged. If you find yourself in a situation where debt is weighing you down and you think that filing for bankruptcy is the best way out, think about the following.

Types of Bankruptcy

If you apply for the Chapter 7 type, you will likely be offered a tax debt discharge on certain types of debt; but with a Chapter 13 type, the entire debt you have in your records will be entered into a payment plan that will be spread over a long period of time (3-10 years).

You should note that while this process is ongoing, the IRS can still progress with its audits. Also, the statute of limitations is functional throughout the bankruptcy process as well as when the collection process is suspended.

Qualifications for Debtor Discharge

To qualify for debtor discharge, you have to fulfill the following:

• The tax debt has to be taxes from personal income.
• You must have recorded a tax-return for the debts 2 years or more prior to filing for bankruptcy.
• Prior to filing for bankruptcy, ensure that you have owed the tax debt for 3 years or more.
• Ensure that prior to the filing, the I.R.S must have evaluated the tax debts about eight months before.
• You have never attempted to evade taxes.

You should be cognizant of the fact that punishment for dischargeable taxes can be discharged too. Furthermore, while the IRS includes debt rebate as a taxable income, that is not the case with bankruptcy.

Taxes Which Cannot Be Discharged

• If the I.R.S has already placed liens on the property prior to filing for bankruptcy.
• If you have punishment on non-dischargeable tax debt.
• If you are owing taxes from un-filed returns

It is always advisable that you consult a tax as well as bankruptcy professional before you make any decisions. This is because they will guide you through the entire process and by so doing, you can avoid common blunders. Also, if you are in debt, it is advisable to attempt to handle tax and bankruptcy problems at the same time, rather than separately. When applied in a correct manner, bankruptcy can be used as an efficient means for firms and individuals to start over.