Tax Implications of a Personal Bankruptcy
Almost everything you do has a tax consequence and filing for bankruptcy is not an exception. Every bankruptcy kind has its own impact on taxes in ways that may not be realized. After all, if it involves taxes, there are rules. One major advantage of bankruptcy is that your discharged debt does not have any real impact on your taxes as a result of it does not count as nonexempt financial gain. In other words, you will not be taxed on your discharged debts. However, if you surrender a home or have not made any mortgage payments – you would not be necessarily eligible for the mortgage tax deduction.
Also, if you are in the middle of an IRS audit, filing bankruptcy will not stop the audit. It will stop collection actions until the bankruptcy process is finished and if the IRS does not issue a Relief of Stay motion. However, the 10-year statute of limitations is extended for the complete time of the bankruptcy continuing and thirty days for body time. Any time collection action comes to a halt, like throughout the process of a suggestion in compromise or throughout the time you’re deemed presently not collectible, the statute is extended, it is recommended to bear that in mind if considering bankruptcy as an option.
While bankruptcy can discharge certain kinds of income tax debts, not all tax debt may be discharged in bankruptcy. Elements that are considered to be priority debt cannot be discharged. This includes support payment, student loans, drunken driving charges, fines stemming from the commission of a criminal offense and priority tax debts: sure penalties (trust fund penalty), fraud assessments and therefore the monetary fund portion of payroll tax debts. Priority debt should be entirely repaid in a Chapter 13 bankruptcy reorganization.
For taxes to be dischargeable in bankruptcy, they have to be income taxes that are a minimum of three (3) years previous as counted from the maturity date of the official document as well as extensions. The personal tax return needs to have been filed by the taxpayer; it cannot be any form of a substitute filed return ready by the IRS. Also, the tax should be assessed at a minimum of 240 days. Therefore if you recently filed your 2006 tax return, you are not free from the liability in a bankruptcy case discharge until 240 days have passed by. And if the IRS has filed a lien against your real or material possession, the tax lien will still be enforceable as to that property.
If you excluded the number of discharged debt from financial gain, you need to use that quantity to scale back sure deductions and credits, known as tax attributes. Generally, these attributes should be reduced in the following order, net in operation losses, general business credit carryovers, minimum tax credits, capital losses, basis of your property, passive activity loss and credit carryovers, and foreign tax credit. It is important to know that if you haven’t filed your tax returns, it doesn’t matter however previous the liability, those taxes can’t be discharged in bankruptcy.
One way bankruptcy will assist you together with your liabilities is within the space of cancellation of debt financial gain. Normally, after you settle a debt for fewer than its full price whether or not it comes from a negotiation with the owner of your credit card debt, a brief sale or another state of affairs wherever you pay but the complete quantity owed on a debt, the distinction between what you owed and what you truly paid is taken into account financial gain for tax functions. This kind of financial gain is termed Cancellation of Debt Income and is typically in the course of the issue of a 1099C form that is announced to the IRS.
Luckily, bankruptcy could be a complete defense to the 1099C financial gain issue. If you filed bankruptcy, debts enclosed in your bankruptcy don’t lead to debt forgiveness financial gain. Furthermore, financial condition could be a defense to the 1099C issue furthermore. This implies that if your liabilities (debts) equals over the honest value of your assets you’re technically insolvent and can’t be accountable for tax penalties on forgiven debt even for debts reduced outside of bankruptcy. If you do have any 1099C’s issued for debts that were included in your bankruptcy, you should consult with an experienced bankruptcy attorney that is willing to work with your CPA to resolve the possible tax issues.
Forgiveness of debt is often thought as nonexempt income, but not once it involves bankruptcy or financial condition. Sometimes, even although you have filed for bankruptcy, your past creditors will still submit a form 1099C to the IRS. This is often a simple state of affairs to handle, particularly if your tax specialist is accustomed to bankruptcy’s impact on forgiveness of debt financial gain. All you would like to try and do is submit the IRS form 982 alongside your taxes and you will most likely not have to pay taxes on the discharged debts in your bankruptcy.
In closing, the tax implications associated with the fling of any bankruptcy case can be very confusing – and if you have any reason to be concerned about the tax issues in your own situation, it is imperative you consult with an experienced bankruptcy attorney that is willing to work with your Certified Public Accountant (CPA). Call us at 770-609-1247 to speak with an experienced bankruptcy attorney today.