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Tag Archive for Bankruptcy

Can Filing Bankruptcy Wipe Out Your IRS Tax Debt?

Life happens! Divorce. Job loss. Serious illness. These are life events that can cause financial hardship and force good honest folks to file for bankruptcy. Those who have struggled with an endless stream of expenses that never end often owe income taxes that just will not let them be.

Taxes are a part of life. This is true after bankruptcy. Before filing your income tax returns when there has been a bankruptcy, it’s important to know things. Many people have either partial or incorrect information whether and how bankruptcy could help.

The following information may help you get a few things straight and find the best choice for you:

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IRS Tax Discharge Explained

In some instances, tax liabilities can be discharged by filing bankruptcy. There are two main types of bankruptcy available (Chapter 7 and Chapter 13), each with definitive and complicated rules regarding discharging tax liabilities. In both instances, the following must be true:

  • Tax returns were timely filed or it has been at least 2 years since the returns were filed
  • Tax returns were last due to be filed for at least 3 years, including extensions
  • Tax liability was assessed at least 240 days before filing bankruptcy
  • Taxpayer did not pursue tax evasion or defeat
  • Tax liability is not due to a fraudulent tax return
  • Tax was not assessable at the time of filing bankruptcy
  • Liability is not due on Trust Fund Tax
  • Tax was unsecured

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Everything You Need to Know About Bankruptcy

Robert McKenzie, Tax Attorney

Types of Bankruptcies
Chapter 7. In a Chapter 7 bankruptcy, all of the debtor’s nonexempt property is liquidated and the proceeds distributed to creditors. Individual debtors receive a discharge of personal liability for pre-petition debts, subject to exceptions in §523, whether or not a proof of claim was filed or the debt was allowed under §502.727(b). Read more

5 Ways to Improve Your Financial Situation

If you are having trouble paying your debts, it is important to take action sooner rather than later. Doing nothing leads to much larger problems in the future, whether it’s a bad credit record or bankruptcy resulting in the loss of assets and even your home. If you’re in financial trouble, then here are some steps to take to avoid financial ruin in the future.

If you’ve accumulated a large amount of debt and are having difficulty paying your bills each month, now is the time to take action–before the bill collectors start calling.

1. Review each debt. Make sure that the debt creditors claim you owe is really what you owe and that the amount is correct. If you dispute a debt, first contact the creditor directly to resolve your questions. If you still have questions about the debt, contact your state or Read more

Cancellation of Debt, Foreclosures, and Bankruptcy – Part 15 (Final)

Your State Income Tax return and CODI

The Commonwealth of Massachusetts complies with all of the federal rules on CODI, deemed sales, and bankruptcy dealing with CODI except the IRC §108(i) Reacquisition of Business Debt Deferral.

For purposes of the corporate excise and the personal income tax, a taxpayer that makes the federal election allowed by IRC § 108(i) is required to add back to gross income any CODI that is deferred under IRC § 108(i). In future years when the deferred CODI is recognized for federal purposes, the taxpayer is allowed to make a corresponding subtraction, since the recognition event will have already taken place for Massachusetts Read more

Cancellation of Debt, Foreclosures, And Bankruptcy – Part 14

Tax Entities and CODI

CODI in Partnerships

Exclusion at partner level – The exclusions apply at the partner level, not at the partnership level. The insolvency of the partnership does not affect the pass-through of the CODI. Each partner may use whichever exclusions they qualify for on their individual returns.

Real Property Business Debt Exclusion – The determination of whether debt is qualified as real property business indebtedness is made at the partnership level. Then, the election to apply the provision is made on a partner-by-partner basis. Read more

Cancellation of Debt, Foreclosures, And Bankruptcy – Part 13


As with all things dealing with income taxes documentation is a must. Since you are dealing with personal, business, or investment use property, it is imperative that you have good documentation for all figures you use in your calculations. The exclusion of CODI and the lack of claiming a deemed sale taxable gain, on the proper forms, is one of the “high risk” audit items at the IRS.

When dealing with your business and investment items you need the same type of documentation that you would use to determine basis for disposition. If the item has been in service and has been depreciated, a copy of the current depreciation worksheets are a Read more

Cancellation of Debt, Foreclosures, And Bankruptcy – Part 11

How to Apply the Exclusions

As mentioned above, if a client qualifies for one of the five exceptions you should apply that exception first. If there is still possible CODI after the exceptions are applied, then you should work your way through the exclusions in order until you reach the end of the exclusions or the end of the CODI, whichever comes first. We will work a comprehensive example at the end of the text that shows this theory at work.

All of the exclusions are documented on the Form 982 in one way or another. There is also an IRS provided insolvency worksheet for use in determining that exclusion. Some of the exclusions require you to reduce your Tax Attributes. We will define and discuss this Read more

Cancellation of Debt, Foreclosures, And Bankruptcy – Part 10

Exceptions and Exclusions to CODI

There are five exceptions to CODI. An exception means that the debt is not included on the tax return on its own merits and does not need to meet any other exclusions or calculations. The exceptions are as follows:

1. Non-Recourse debt. As indicated in the earlier text and non-recourse debt is not the responsibility of the debtor over the amount of the collateral seized, unless the debtor does a “workout” with a different lender than the original creditor, than the CODI is included. But it may meet one of the exclusions later in the text.

2. Gifts. If the debt cancellation was intended as a gift from the creditor to the debtor there Read more

Cancellation of Debt, Foreclosures, And Bankruptcy – Part 9

Chapter 13

A chapter 13 bankruptcy is often called a “wage earner’s” bankruptcy. It enables individuals with regular income to develop a plan to repay all or part of their debts over three to five years. During this time the law forbids creditors from starting or continuing collection efforts.

Advantages – A particular advantage of chapter 13 is that it provides debtors with an opportunity to save their homes from foreclosure by allowing them to “catch up” past due payments through a payment plan.

Effect on collections – Individuals may use a chapter 13 proceeding to save their home Read more

Cancellation of Debt, Foreclosures, And Bankruptcy – Part 8

Bankruptcy and CODI

All bankruptcy falls under USC Title 11. There is also a bankruptcy Chapter 11. This similarity causes a lot of confusion. Since we are mainly dealing with personal tax returns, we will not deal with the Chapter 11 bankruptcy in this course. We will be talking about Chapter 7 and Chapter 13 of the Title 11 Code.

Chapter 7

Chapter 7 is the “discharge” chapter. In a Chapter 7 bankruptcy all included debts are theoretically discharged. If there are assets secured by those debts the assets are usually forfeit. The Deemed Sales and CODI rules apply in those cases. Read more

Cancellation of Debt, Foreclosures, And Bankruptcy – Part 7

Alternatives to Foreclosure

Foreclosures are usually a last resort for both the lender and for the debtor. There are many alternatives to foreclosure, some still require the debtor to give up the property but most allow the debtor to keep possession of their property and make alternate payment arrangements.

Mortgage Modifications: This is normally a type of refinance under better terms then the current mortgage. It will lower the interest rate and extend the life of the loan. This results in a smaller monthly payment. The debtor keeps the home.

Forbearance: This is the lender allowing the debtor to miss one or a series of payments Read more