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1. patrick armstrong Athens | Bankruptcy and Taxes

2. Eliminating Tax Debts in Bankruptcy
Bankruptcy and taxes settle still remain a hot debate issue in tax advisory
circles especially on whether filing bankruptcy can be a ground for withdrawing
liens and IRS “forgiveness.” Different bankruptcy and taxes laws give
contradicting picture on what should happen when a tax payer files for
bankruptcy amidst an outstanding tax debt. There should be a clear law
outlining the relationship between bankruptcy and taxes to avoid further
debates among lawyers and IRS experts. However according to the provisions
of Internal Revenue Code in the bankruptcy and taxes section, filing for
bankruptcy does not absolve the taxpayer from liens on his property or
business. So where is the meeting point?

3. What are my options after filing for bankruptcy?
There are number of options available for a person that has filed for bankruptcy
to be shielded from tax debts. Bankruptcy incapacitates the ability of the IRS in
collecting tax dues whether in form of accessing bank accounts and wages.
Although it may make collection difficult, it does not force IRS to remove lien
on your property and assets. However, in some instances, IRS may be forced to
release the lien because it has no value. With a release of lien, it means that the
agency may fail to recover the debt but continues to hurt the credit score of the
taxpayer and his name remains listed as a defaulter by credit agencies. This
rating can only expire after about 10 years.

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Chapter 7 however, has significant provisions that can be used to your
advantage to eliminate debt without repaying, as well as the IRS, and give your
finances a new lease of life. In addition to the provisions of the chapter,
bankruptcy can afford the taxpayer access to other services such as offer in
compromise and tax payment arrangements. Usually IRS does not grant offer
in compromise unless where the taxpayer has satisfied the stringent provisions.

5. Qualifying for Discharge
Tax experts and attorneys have devised a way of working around the bankruptcy law to
allow taxpayers to discharge taxes after bankruptcy. However, whether a debtor can
discharge tax debt depends on the nature of tax, the period of tax debt (years of
accumulation), whether the taxpayer had filed returns and the nature of bankruptcy.
Chapter 7 (Federal income taxes) are dischargeable subject to a number of conditions.
The discharge must be for income taxes, there exists legitimate tax returns and tax
liability that is older than three years, the taxpayer satisfies the 240-day rule and that no
tax evasion or fraud was attempted by the taxpayer. Penalties on taxes that are
dischargeable are also eligible for discharge. After the discharge of tax liability, a debtor
is no longer responsible for paying the taxes and the IRS may not garnish a debtor's
wages or bank accounts.

6. The impact of Chapter 7 on Taxes
Taxes due can be eliminated as provided in Chapter 7 subject to satisfying a number of
requirements. To begin with, before accumulation of the debt you must have
constituently filed tax returns. Do not rely on substitute for returns filed by IRS to bail
you out of the dilemma. First of all, for special provisions of bankruptcy and taxes to
take effect, you must have filed returns 2 years before the date of bankruptcy. Also, your
returns must have been due for filing 3 years prior to the bankruptcy. IRS must have
indicated your outstanding taxes on their books about 240 days before you filed for
bankruptcy. The amount outstanding in your taxes must be in form of income taxes
because trust fund taxes cannot be eliminated under the provisions of Chapter 7. Ensure
that there is no fraud attached to your tax returns. Taxes outstanding from fraud cannot
be absolved in bankruptcy.

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The relationship between bankruptcy and taxes is a question of timing and
not legal provisions. Your ability to use bankruptcy to eliminate taxes is an issue
of timing – when the returns were filed and when bankruptcy has been filed.
For instance, you should file for bankruptcy when your taxes are old enough to
gain eligibility for discharge. During bankruptcy cases, taxes get a privileged
consideration compared to other forms of debts such as credit cards that do not
receive any priority. Today, you can file for bankruptcy and eliminate credit
cards almost on the same day. However, bankruptcy and taxes remain a big
issue because taxes are a debt to the government and requires an elaborate
planning and footwork.

8. Federal Tax Liens
Despite of the great relief that chapter 7 delivers to a taxpayer through
discharge of debt, if the IRS had put a lien on the defaulter’s property before the
filing of the bankruptcy and taxes it will still hold after the discharge. It is
therefore advisable to clear the identity by paying off the lien before disposing
the property.

9. Tax Debt Not Eligible for Discharge
Not all types of debts are eligible for discharge under Chapter 7 bankruptcy.
Some of the debts include tax fines from tax debt that is disqualified for
discharge, tax debts from tax returns that have not been filed and taxes from
trust funds or withholding taxes in remission from an employee's pay check by
the company.

10. Due to the intricacy involved when connecting bankruptcy and taxes
elimination, one of the greatest advantages of leveraging on the provisions of
Chapter 7 is that you are relying on timing issues and bankruptcy law. This is
contrary to the other options where you are under the mercy of IRS to give you
a fresh start from its programs such as offer in compromise. You should also
consider that the offer in compromise can take up to even a year to be reviewed
and get approval by IRS. On the other hand, Chapter 7 slashes the waiting by
almost half. Where the IRS filed a tax lien prior to your bankruptcy, they do not
need to necessarily lift it off once the bankruptcy is over.

11. If you are unable to settle your debt under this bankruptcy and taxes trade
off as per Chapter 7, there are other arrangements to consider. You can enter
into an instalment agreement with the IRS as a payment plan to pay off the
debt. You can also make IRS an offer in compromise that will allow you to settle
the debt for less than the amount in arrears.