The Bankruptcy Petition

We, as tax professionals, do not file the paperwork for our clients. (In Louisiana that is called practicing law without a license.) But we can help them gather and organize the information they will need. If any of you have been involved in OIC applications you will see the similarities in the process here.

It is important that you understand the basics of the bankruptcy petition and various attachments in order to assist your client in gathering the necessary documents to file with the court or provide his attorney.

See the Appendix for a sample of the bankruptcy paperwork your client may have to file. As Read More

Bankruptcy and Retirement Accounts:

If the debtor can access the funds in a retirement account, so can the IRS. Unless the account is listed as exempt (§6334), the fiduciary of the account will yield to an account collection by the IRS.

If the lien is against an exempt asset, such as a retirement account, the IRS can and will pursue the lien for the remainder of the tax liability not paid off in the bankruptcy. This will remain attached until the taxpayer can access the funds or the CSED runs out unless the debt is settled prior to that time. (I.R.M. 5.11.6.2)

The IRS will not usually levy a retirement account unless the taxpayer meets the definition Read More

Chapter 13 Bankruptcy

Chapter 13 is better known as a “working man’s” bankruptcy. This is because debtors have cash flow and will “pay off” their debt over time in the bankruptcy. No assets are lost in a Chapter 13 as debtors “buyback” their equity in any assets during the payment period.

Eligible taxes, credit cards, medical bills, and other debts can be paid off in this type of bankruptcy. There are some debts, as with the Chapter 7 as well, that are not dischargeable in this type of bankruptcy such as child support and student loans.

The fee, as of 06/01/14, to file a Chapter 13 bankruptcy is $350. Read More

Bankruptcy falls under U.S.C. Title 11. This can sometimes cause confusion as there is a bankruptcy Chapter 11 as well. We are going to deal with the two chapters that are most prevalent in our jobs as tax professionals, Chapter 7 and Chapter 13.

Chapter 7 Bankruptcy

Chapter 7 is better known as a “liquidation” bankruptcy. This is because the things included in the bankruptcy are liquidated (or sold) to pay off the debt and all other debts included in the bankruptcy are eliminated.

Most Chapter 7 cases are “no asset/no equity” cases. Meaning that the filer has no assets or equity in any property so nothing is lost but all debts are eliminated. Read More

Other Showstoppers

Timing is not the only showstopper involving taxes and bankruptcy. There are several other items that will disqualify liabilities from discharge.

1. The taxes involved must be income taxes. This means that things like trust fund taxes (payroll taxes that belong to the employee) are not eligible. Federal and state unemployment taxes and workers compensation payments are NOT trust fund taxes as qualify the same way as income taxes.

2. The taxpayer must have actually filed a true tax return. The taxpayer must be compliant in all federal and state tax filings. The IRS having filed a Substitute For return (SFR) is not Read More

Timing Rules

Income tax bankruptcy is all about timing. There are three rules that must be satisfied, in the proper order, for taxes to be discharged in bankruptcy.

1. The Three Year Rule
2. The Two year Rule
3. The 240 Day Rule

The Three Year Rule:

The bankruptcy must be filed more than three years after the return was due to be filed (including timely filed extensions). Read More

Many people in America have debt problems. A lot of those people will, at one point or another, either consider or file for bankruptcy. Unlike the television commercials would have you believe, bankruptcy is not the solution to all a client’s money problems, especially, if it involves income taxes.

The Benefits of Bankruptcy

First we will look at the advantages of your client contemplating a bankruptcy filing that includes federal income taxes. If the client is eligible, a bankruptcy may be an alternative to several payment options the IRS may favor. These include:

1. Installment Agreements – While in an installment agreement the client continues to Read More