laz
02-08-2005, 03:16 PM
Bankruptcy and the IRS: How Does Uncle Sam View Your Tax Debt?
February 2, 2005
Gfn.com News
Most civilized, multi-credit card toting Americans know that a bankruptcy can free you up from crushing debt, but also provides a nasty black mark against your credit history for seven to 10 years.
As it is tax season, you may well be wondering: what of the Internal Revenue Service? With the swipe of a judge’s gavel you’ve wiped out all your debt but you still have a huge tax bill hanging over you. Isn’t the government subject to the fall of the gavel as well?
The answer is that it depends on what kind of taxes are owed, and which type of bankruptcy you've filed. How the rules are applied depends on the kind of bankruptcy you elect. The two most-common types of bankruptcy filings available to individuals are Chapter 7 or Chapter 13, and the rules for each are applied differently.
Chapter 7
This is a liquidation bankruptcy where you give up all your non-exempt assets in exchange for a discharge of all your debts.
Under a Chapter 7 bankruptcy, income taxes for years ending on or before the date of filing the bankruptcy petition (including extensions) and within three years of the filing date can't be discharged. But income taxes owed for periods longer than three years can be eliminated.
However, payroll taxes - Social Security and FICA - or employee withholdings that you owed cannot be discharged, even after three years.
So if you work for a company in any capacity where you can be found to be a "responsible person," make sure that payroll taxes and withholdings are sent to the IRS.
If you're ever in a cash-flow position where you don't have the dollars to send what's due to the IRS, mark your check "trust fund portion only." The IRS can't hold you personally liable for the matching part of the Social Security and Medicare payments not sent in.
Chapter 13
Under this form of bankruptcy, designed for wage earners "with regular income," you agree to a plan to pay off your debts over a period of time, usually for pennies on the dollar.
Under this kind of bankruptcy, the court has the discretion to discharge taxes owed to the IRS without regard to the three-year rule, so long as you complete the payments under your Chapter 13 plan.
Even the IRS doesn't mess with the bankruptcy courts. When the courts say the tax is discharged or impose an automatic stay against collection, that's it. It's over.
February 2, 2005
Gfn.com News
Most civilized, multi-credit card toting Americans know that a bankruptcy can free you up from crushing debt, but also provides a nasty black mark against your credit history for seven to 10 years.
As it is tax season, you may well be wondering: what of the Internal Revenue Service? With the swipe of a judge’s gavel you’ve wiped out all your debt but you still have a huge tax bill hanging over you. Isn’t the government subject to the fall of the gavel as well?
The answer is that it depends on what kind of taxes are owed, and which type of bankruptcy you've filed. How the rules are applied depends on the kind of bankruptcy you elect. The two most-common types of bankruptcy filings available to individuals are Chapter 7 or Chapter 13, and the rules for each are applied differently.
Chapter 7
This is a liquidation bankruptcy where you give up all your non-exempt assets in exchange for a discharge of all your debts.
Under a Chapter 7 bankruptcy, income taxes for years ending on or before the date of filing the bankruptcy petition (including extensions) and within three years of the filing date can't be discharged. But income taxes owed for periods longer than three years can be eliminated.
However, payroll taxes - Social Security and FICA - or employee withholdings that you owed cannot be discharged, even after three years.
So if you work for a company in any capacity where you can be found to be a "responsible person," make sure that payroll taxes and withholdings are sent to the IRS.
If you're ever in a cash-flow position where you don't have the dollars to send what's due to the IRS, mark your check "trust fund portion only." The IRS can't hold you personally liable for the matching part of the Social Security and Medicare payments not sent in.
Chapter 13
Under this form of bankruptcy, designed for wage earners "with regular income," you agree to a plan to pay off your debts over a period of time, usually for pennies on the dollar.
Under this kind of bankruptcy, the court has the discretion to discharge taxes owed to the IRS without regard to the three-year rule, so long as you complete the payments under your Chapter 13 plan.
Even the IRS doesn't mess with the bankruptcy courts. When the courts say the tax is discharged or impose an automatic stay against collection, that's it. It's over.