Common Tax Issues During Bankruptcy

Table Of Contents

What Tax Debts Are Not Dischargeable in Bankruptcy?

Tax debts that are not dischargeable in bankruptcy include certain types of income tax and property tax. Income tax from recent tax years generally remains non-dischargeable. Income tax returns filed late or not filed at all create non-dischargeable tax debts. Income tax with fraudulent tax returns also falls into the non-dischargeable category. Tax debts with an assessment date within 240 days of a bankruptcy filing are also typically non-dischargeable.
Property tax assessments with a lien on the property are usually non-dischargeable. Trust fund taxes, such as payroll taxes withheld from employee wages, are never dischargeable. These taxes are considered funds held in trust for the government. Excise taxes and customs duties also fall into the non-dischargeable category. Consulting a bankruptcy lawyer helps identify specific non-dischargeable tax debts.

How Does Bankruptcy Affect Tax Refunds?

How does bankruptcy affect tax refunds? Bankruptcy affects tax refunds by classifying tax refunds as assets of the bankruptcy estate. A bankruptcy trustee claims a tax refund to pay creditors. The timing of the tax refund receipt relative to the bankruptcy filing date determines the tax refund's status. A tax refund received before a bankruptcy filing becomes part of the bankruptcy estate. A tax refund received after a bankruptcy filing but for a pre-petition tax year also enters the bankruptcy estate.
A bankruptcy filer may exempt a portion of a tax refund using available exemptions. Exemption laws vary by jurisdiction. A bankruptcy lawyer helps determine available exemptions for a tax refund. A tax refund for a post-petition tax year generally remains the property of the bankruptcy filer. The bankruptcy trustee does not claim post-petition tax refunds.

Common Issues with Tax Liens in Bankruptcy

Common issues with tax liens in bankruptcy involve the secured nature of the tax debt. A tax lien gives a government entity a security interest in a filer's property. This security interest means the government agency has a claim on the property. A tax lien generally survives a bankruptcy discharge. The discharge eliminates personal liability for the tax debt. The tax lien on the property remains.
A bankruptcy filer can sometimes remove or "strip" a junior tax lien in Chapter 13 bankruptcy. This process requires meeting specific criteria. The tax lien must be on a property with insufficient equity to cover the lien. A bankruptcy lawyer assesses the feasibility of tax lien stripping. A tax lien complicates the sale or transfer of property after bankruptcy.

Does a Bankruptcy Filing Stop Tax Collections?

A bankruptcy filing does stop tax collections through an automatic stay. The automatic stay is a court order. The automatic stay prevents most creditors, including tax authorities, from continuing collection activities. This includes wage garnishments, bank levies, and property seizures. The automatic stay provides temporary relief from aggressive collection efforts.
The automatic stay does not stop all tax collections indefinitely. The automatic stay provides time for a bankruptcy filer to reorganise finances. Certain tax collection actions may resume once the bankruptcy case closes. The automatic stay does not apply to certain ongoing tax audits or criminal tax investigations. A bankruptcy lawyer explains the scope and limitations of the automatic stay.

What Are the Tax Implications of Debt Forgiveness in Bankruptcy?

The tax implications of debt forgiveness in bankruptcy involve the exclusion of cancelled debt from taxable income. The Internal Revenue Service (IRS) generally considers cancelled debt as taxable income. Bankruptcy provides an exception to this rule. Debt discharged in bankruptcy is not considered taxable income. This exception prevents a bankruptcy filer from facing a large tax bill on cancelled debts.
This exclusion applies to most debts discharged in Chapter 7 or Chapter 13 bankruptcy. The bankruptcy discharge eliminates the legal obligation to repay certain debts. The tax relief provided by bankruptcy is significant. A bankruptcy filer does not report discharged debt on a tax return. This provision helps a bankruptcy filer achieve a fresh financial start without additional tax burdens.

How Does Tax Priority Influence Bankruptcy Distributions?

Tax priority influences bankruptcy distributions by determining the order of payment for tax debts. Certain tax debts receive priority status in bankruptcy. Priority tax debts are paid before general unsecured creditors. These include recent income taxes, trust fund taxes, and certain property taxes. The Bankruptcy Code outlines specific criteria for priority status.
Priority tax debts must be paid in full in Chapter 13 bankruptcy plans. A Chapter 13 plan proposes a repayment schedule for creditors. Non-priority tax debts are treated like other unsecured debts. These debts may receive only a partial payment or no payment at all. The priority status of tax debts significantly impacts the financial outcome for both the bankruptcy filer and the creditors.

FAQS

What specific types of income tax are non-dischargeable?

Specific types of income tax are non-dischargeable. These types include tax from returns due within three years of filing. Unfiled returns are non-dischargeable. Fraudulent returns are non-dischargeable. Income tax assessed within 240 days of filing also remains non-dischargeable.

How does a tax lien affect my ability to sell property after bankruptcy?

A tax lien affects your ability to sell property after bankruptcy because the lien generally remains attached to the property. The property sale proceeds must first satisfy the tax lien.

Are all government debts non-dischargeable in bankruptcy?

Not all government debts are non-dischargeable in bankruptcy. Many government debts, apart from certain tax obligations, student loans, and fines, can be discharged.

Can bankruptcy help with older tax debts?

Bankruptcy can help with older tax debts if the debts meet specific age and filing requirements. Older income tax debts often become dischargeable after a certain number of years.

What is the difference between a tax lien and a tax levy?

The difference between a tax lien and a tax levy is this: a tax lien is a legal claim against property. A tax lien secures a tax debt. A tax levy is the actual seizure of property. A tax levy satisfies a tax debt.

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