With the downturn in\nthe economy and massive job losses, bankruptcy filings will skyrocket this year.\n<\/p>\n\n\n\n
Unpaid tax liabilities\nwill likely be a large part of clients\u2019 debts. There is a common misconception\nthat income taxes are never dischargeable in bankruptcy. In reality, certain tax\nliabilities are dischargeable in bankruptcy. By becoming familiar with tax\nrules, client advisors can assist clients determine whether bankruptcy will\nhelp them.<\/p>\n\n\n\n
Advisors should also explore bankruptcy alternatives for dealing with tax liabilities, including innocent spouse relief, penalty abatement, installment agreement, or an offer in compromise (OIC). Such administrative tax resolution methods avoid a bankruptcy entry on a credit report. <\/p>\n\n\n\n
If those alternatives are\ninsufficient, there are several tax rules related to bankruptcy that all advisors\nshould know:<\/p>\n\n\n\n
1. <\/strong>Not all taxes are dischargeable in\nbankruptcy. <\/p>\n\n\n\n Only income taxes are\ndischargeable. Taxes such as payroll taxes, trust fund taxes, or sales taxes\ncannot be eliminated in bankruptcy. Even worse, these non-dischargeable taxes\nmay also be priority debts. There are other strategies to minimize these non-dischargeable\ntaxes, but you cannot discharge them. <\/p>\n\n\n\n 2. Must be 3 years or older.<\/p>\n\n\n\n More than 3 years must have elapsed since the tax return generating the liability was due, including extensions. Various acts such as prior bankruptcies, collection due process (CDP) hearings, and innocent spouse relief can extend the 3 year time frame.<\/p>\n\n\n\n In other words, to\nwipe out the tax liability, the bankruptcy cannot be filed until 3 years after\nthe original due date of the tax. For example, if the unpaid tax was due from a\n2015 tax return, the due date of that tax liability would be April 15, 2016. You\nwould have to wait until April 15, 2019 to file the bankruptcy to discharge the\nIRS tax liability. The best way to ensure that the timing is correct is to carefully\nreview an IRS Record of Account (beware this document is hard to understand and\nread)<\/p>\n\n\n\n 3.\u00a0 Tax return filed more than 2 years before the bankruptcy filing.<\/p>\n\n\n\n The tax return must have been filed more than 2 years before than the bankruptcy petition (generally applicable to late-filed returns). Thus, even if the debt is over 3 years old, if you filed the return late and 2 years has not yet passed, then you cannot wipe out the tax liability.\u00a0 Note, that IRS-prepared \u201csubstitute for returns\u201d are not considered filed returns for this purpose, and thus a tax liability assessed from them would not be subject to discharge. Therefore, it is almost always advisable for the client to file all delinquent returns and let the time frames pass before the bankruptcy petition is filed.<\/p>\n\n\n\n 4. 240 day rule. <\/p>\n\n\n\n The IRS must formally have\n\u201cassessed\u201d the income tax liability at least 240 days before you file your\nbankruptcy petition. The IRS can extend this time period due to suspended collection\nactivity because of an offer in compromise or a previous bankruptcy\nfiling. The best way to make sure this\nhas occurred is to review an IRS Record of Account.<\/p>\n\n\n\n 5. Cannot be the\nsubject of fraud or willful tax evasion. <\/p>\n\n\n\n You cannot wipe out tax\nliability if you filed a false or fraudulent tax return or willfully attempted\nto evade paying taxes. For example, if you underreported income falsely, you\ncannot wipe out the debt after getting caught.<\/p>\n\n\n\n Example: Joe files his\n2013 tax return on April 15, 2015. The IRS assessed the taxes the same day. Joe\nmet the requirements of the 3-2-240 rules on April 15, 2018. (This example is a\nbit simplified. You should always check the actual assessment date and not\nassume it is the same as the filing date.)<\/p>\n\n\n\n A bankruptcy filing\nimmediately stops the collection efforts of all creditors, including the IRS. The\nrules governing the discharge of tax debts in bankruptcy proceedings are\ncomplex. But that should not discourage clients from considering the\npossibility. An experienced tax attorney can help determine if a client can\ndischarge an income tax liability and whether other options may be available.<\/p>\n","protected":false},"excerpt":{"rendered":" With the downturn in the economy and massive job losses, bankruptcy filings will skyrocket this year. Unpaid tax liabilities will likely be a large part of clients\u2019 debts. There is a common misconception that income taxes are never dischargeable in bankruptcy. In reality, certain tax liabilities are dischargeable in bankruptcy. By becoming familiar with tax […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_daextam_enable_autolinks":"","_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[1],"tags":[],"class_list":["post-3617","post","type-post","status-publish","format-standard","hentry","category-planning-for-tax-minimization"],"_links":{"self":[{"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/posts\/3617","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/comments?post=3617"}],"version-history":[{"count":1,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/posts\/3617\/revisions"}],"predecessor-version":[{"id":3621,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/posts\/3617\/revisions\/3621"}],"wp:attachment":[{"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/media?parent=3617"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/categories?post=3617"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/tags?post=3617"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}