Should I file bankruptcy

Perspective on Bankruptcy bill

Choices for failed start up

Credit repair

Creditor rights

Small business bankruptcy

Debts & elders

FAQ

Site guide

Meet our lawyers

Table of contents

Search the site                   

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). 

The IRS generally expects you to pay to them whatever income is excess in their view of what it should cost you to live for 50 months or the remainder of the collection statute, whichever is less. More on offers in compromise by a tax practitioner and the IRS on offers.

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. 

  More (really dense) reading on bankruptcy and tax consequences of foreclosure.

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. 26 I.R.C. 108 and 11 U.S.C. 346 (j)(1). 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.  Note that the tax treatment of debt forgiven in bankruptcy is a marked difference between bankruptcy and debt management programs. See the dangers of debt management.

Are shareholders liable for the tax debts of their corporation?

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. 

      More on trust fund taxes in bankruptcy

What happens to tax liens that survive the Chapter 7 discharge?

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; 
• file a Chapter 13 to pay the lien over time if it attaches to assets of significant value.  

          More on Chapter 13.

Can the bankruptcy court decide tax disputes?

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.