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How Does Bankruptcy Affect Taxes Owed

The Automatic Stay Does Not Apply To Debt Incurred After Filing Bankruptcy

How does filing Chapter 7 Bankruptcy affect filing taxes in Minnesota? By Dr. Jesse Horoshak

The auto-stay serves to protect you from creditors trying to collect debt you incurred before you filed bankruptcy. The auto-stay does not prevent creditors from trying to recover debt you incurred after you filed your bankruptcy, also called “post-petition debt.” If you incurred tax debt after filing a Chapter 7 or 13 bankruptcy, the automatic stay will not prevent the IRS from attempting to collect.

How Are Back Taxes And Unfiled Tax Returns Handled In A Business Bankruptcy Filing

You may not discharge, or cancel, taxes that are owed for tax periods in which tax returns were not filed. However, you may be able to discharge some back taxes owed when you declare business bankruptcy.

If your business has not filed taxes for the past three tax years, the IRS may cancel your debt for the previous tax periods. This relief is not automatic, but may be achieved by working with an attorney who can apply for it and negotiate on your behalf. The three-year rule applies to when taxes were due, but you may have filed your tax return for that tax period as recently as two years before filing for bankruptcy. This two-year test may come into play if you filed your tax return late.

Consumer Proposals Vs Bankruptcy And Cra Debt

A consumer proposal is a popular alternative to bankruptcy because it provides debt relief from unsecured creditors, including debt forgiveness from CRA. When you file a consumer proposal with a licensed insolvency trustee you are not required to sell any of your assets to repay your debts or pay any surplus income.

To start the consumer proposal process, you will first need to schedule a consultation with a licensed insolvency trustee where you will review your finances. After reviewing your income, expenses, and total debts, the two of you will find a fair amount that you can pay each month to all of your creditors. These payments can last up to five years after which, you will be discharged from all debts covered by the proposal, including CRA debts.

Tax debt in Canada can be included in a consumer proposal and the CRA will often accept less than your full amount owing, though how much they will settle for will depend on the situation. In order to get the CRA to accept your proposal, you will have to file any and all outstanding tax returns. If you want CRA debt relief and 50% or more of your total unsecured debts are owed to the agency, you will have to get them to accept the proposal.

If a consumer proposal is not a viable option for you, then filing for bankruptcy may be your next solution. With this, your trustee would be required to file a pre-bankruptcy tax return and a post-bankruptcy tax return.

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New York State Tax Lien

  • Non-dischargeable tax debt is collectible for 20 years, with the 20 year period being renewed whenever a payment is made.
  • Tax lien is created by filing of NYS Tax Warrant, which attaches for 10 years to all personal property in any location, and to all real estate located in the County where it is filed.
  • New York State exemptions limit the State Tax Departments ability to collect, protecting many assets from seizure, including: the 10% limit on salary garnishments the $50,000.00 homestead exemption for residences the protections afforded qualified pension plans, profit sharing plans, IRAs and most retirement plans.

Which Tax Debts Get Discharged

How does bankruptcy affect your tax debts?

Debtors can discharge some tax debt in bankruptcy, but not all. Taxes must meet the following criteria before being forgiven:

  • The taxes are on wage-related income or gross receipts .
  • The income taxes were due at least three years before you filed the bankruptcy.
  • You filed your tax return at least two years before you filed the bankruptcy case. If you did not file a return, if you filed the return late, or if the IRS filed a substitute return for you, some bankruptcy courts have held that those taxes will never qualify for a discharge.
  • IRS tax assessmentthe process of entering the tax on the books as a tax liabilityoccurred at least 240 days before filing for bankruptcy. This period could be lengthened if you had pending an offer in compromise or if you filed a prior bankruptcy case.
  • You didn’t commit fraud or willfully try to evade paying your taxes for the tax year in question.

If you meet all of these factors, the chances are that your tax debt will be dischargeable. If not, your tax obligation won’t go away in a bankruptcy case.

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The Return Was Filed At Least Two Years Ago

The tax debt must be related to a tax return that was filed at least two years before the taxpayer files for bankruptcy. The time is measured from the date the taxpayer actually filed the return. In most cases, this covers the same period of time as the due date rule, unless you missed the due date and filed the return late.

Tax debts that arise from unfiled tax returns are not dischargeable. This is an important distinction, because the IRS routinely assesses tax on unfiled returns. These tax liabilities can’t be discharged unless and until the taxpayer files a tax return for the year in question.

Do Taxes Affect Your Credit Score

Whether tax debts appear on your and will impact your credit score depends on what type of legal action the CRA uses to enforce collection.

In general, the Canada Revenue Agency keeps your information confidential and does not report filing or personal information to Canadas credit bureaus. They will only release information where they are legally authorized to do so and if they are forced to take legal action through the courts.

If you have a balance owing after filing your tax return, this is not reported to the credit bureaus. The CRA is not a normal reporting creditor like your credit card issuer, cell phone company or bank.

If you owe a significant amount of money in taxes and do not make efforts to repay, the CRA will get their collections department involved. Debt collection is the process of pursuing payments for the debt owed.

If necessary to pursue you for unpaid taxes, CRA can legally certify, or register, your debt with the Federal Court or get a judgement from a provincial court confirming the amount owed. This court judgement becomes a matter of public record and can appear in the legal section of your credit report.

While your tax debt may not appear on your credit report, if you are applying for a mortgage or large loan, your lender or bank will often request that you provide proof that your taxes are current. This is almost a guaranteed request if you are self-employed or running a small business.

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Accruing New Debt Under Bankruptcy

One of the provisions of a bankruptcy is that the debtor may not acquire any other delinquent balances while under the courts supervision. Barger said taxes may be defined as new debt if a person is unable to pay them. That can either force the court to dismiss or convert the current bankruptcy.

New debt that a person acquires while already in a bankruptcy is not protected from collection by the bankruptcy court, because it was not disclosed in the initial filing, Barger said.

In a Chapter 11 or Chapter 13 filing, both of which stretch over a period of time, the failure to file taxes or to keep current on new tax payments can result in a conversion of the bankruptcy to a Chapter 7 unless the case is dismissed entirely, Archer said.

Chapter 7 bankruptcies are much more brutal than 11s or 13s because they will liquidate all non-exempt assets to pay creditors,” he said. ” 11s and 13s are more like court-brokered negotiations.

In a Chapter 7 case, Archer explained, the failure to pay post-petition taxes will affect neither the bankruptcy nor the tax debt.

The debt isn’t discharged in the bankruptcy case, and the bankruptcy code prohibits filing for a Chapter 7 bankruptcy more than once every eight years, he said. So that debt wouldn’t be going anywhere.

Divorce And Bankruptcy Law In Canada

What Are Back Taxes and How Do They Affect You?

Home » Blog » Divorce and Bankruptcy Law in Canada

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2015-12-10

Family law and bankruptcy law frequently overlap and the effect can be quite complicated. Our Bankruptcy and Divorce Canada fact sheet will answer some key questions you may have however it is always important that you talk to your bankruptcy trustee about your specific situation.

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How To File Taxes During Bankruptcy

For a small number of chapter 7 and chapter 11 debtors it may be appropriate and helpful to file two tax returns an individual Form 1040 return and a Form 1041 return for the bankruptcy estate.

The bankruptcy estate consists of all of the assets an individual owned on the date the bankruptcy petition was filed. It is treated as a separate taxable entity for individuals filing petitions under chapter 7 or 11 of the Bankruptcy Code.

Bankruptcy Is Supposed To Help You Get A Fresh Start When You Have Too Much Debt But It Will Affect Far More Than Just Your Credit Scores

There are different types of bankruptcy called chapters and the type of debt you have can influence the chapter you need to file, and how your bankruptcy case will progress. In some cases, the bankruptcy court may require you to sell your assets in order to pay part of your debt. Or, the court may make a payment arrangement for you to pay off creditors over several years before the remaining balance of your debt can be discharged.

If your debts include tax debt, you may be able to get it discharged, depending on the type of tax debt.

Because laws related to bankruptcy and taxes are both complicated, its important that you understand before you file for bankruptcy how it will affect past tax debt as well as future obligations to the IRS. Its best to consult with a lawyer before making any decisions about bankruptcy . But this guide can help you learn a little more about how bankruptcy can affect your taxes during and after filing.

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What About My Tax Refund

This question comes up quite a bit. If you anticipate a large refund, talk about this issue with your attorney. It may be a good idea to delay filing until after you receive your tax year refund for the past year. Technically, when consumers file for bankruptcy, all their non-exempt property goes to the trustee. That includes tax refunds. Since the policies vary depending on where you live, you may be able to use the wildcard exemption to exempt the tax return.

Let’s Summarize…

Owing past-due income taxes can be stressful. These bills are often so high that, even if you fall behind a little, you could end up owing a lot of money. Fortunately, if your debts meet certain requirements, filing Chapter 7 bankruptcy can erase past-due income tax debt in one fell swoop.

Consumer Proposal Tax Returns Vs Bankruptcy

Does Bankruptcy Affect My Tax Return?

It is essential to consider the future of your tax returns when you are weighing your options and considering a consumer proposal vs a bankruptcy.

One of the reasons David Sklar & Associates encourages clients to consider a consumer proposal over bankruptcy is that it allows you to keep your tax refunds and protects you in the case of any future increases in income

In the case of a consumer proposal, you will agree to pay your creditors a fixed monthly amount for a period of up to five years. That agreement doesnt change unless you file for a new one with a faster payback rate.The average tax refund in Canada is $1,700, which is money that can help a lot when youre climbing your way out of debt. In bankruptcy, these returns are forgone. Consider how consumer proposal tax returns get treated differently than bankruptcy tax returns.

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How To Beat The Irs: Dischargeability Of Taxes In Bankruptcy

How to Beat the IRS: Dischargeability of Taxes in Bankruptcy

With a few exceptions, the Bankruptcy Code adheres to the age-old rule that in life, only death and taxes are certain. It isnt so easy to beat the IRS because the Bankruptcy Code significantly limits a debtors ability to discharge taxes in bankruptcy. A bankruptcy professional has to have an intimate understanding of the Bankruptcy Code in order to know when you can beat the IRS and when you cant. Your starting point should be an understanding as to when a discharge of a tax is permitted.

Beating the IRS in bankruptcy court can sometimes feel like asking the San Diego Padres to beat the New York Yankees. The IRS has very low hurdles to clear in order to make a tax debt stick around. First, the IRS must show that the tax is of the kind that cant be discharged. The type of tax, the date the tax was assessed, the date it was due, whether it is a tax or penalty and other factors are all relevant. Second, the IRS must prove this only by a preponderance of the evidence, which is lawyer talk for maybe Im right, and maybe Im wrong. The IRS must also demonstrate that the claim is for either a tax or tax penalty. The Bankruptcy Code does not define what is a tax and just because Congress or a local legislature called it a tax does not necessarily mean it is a tax.

I. Priority and Gap Period Taxes: The Wait Three Years After Filing the Return or 240 Days After Being Assessed Rule.

Bankruptcy Discharge Wont Remove Liens

While the automatic stay can stop new lien petitions, existing liens arent removed when you file. If you have a federal tax lien placed on any property because of back taxes that you owe, the discharge of that debt during bankruptcy wont remove the lien. Even if the debt itself is discharged during your bankruptcy, the lien must be paid. Make sure to do this as quickly as possible, so you dont have issues if you try to sell the property.

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Are There Other Ways To Limit My Companys Tax Obligations During Bankruptcy

You might not be able to discharge all of your business tax obligations, but you may have other options for dealing with your debt if you are behind on taxes when you decide to declare bankruptcy. Sometimes, it makes sense to work out installment payment plans with the IRS or enter into an agreement to pay a reduced amount, called an Offer in Compromise.

In addition, the CARES Act passed in March 2020 revised the U.S. Bankruptcy Code to make it easier for some business owners to declare Chapter 11 bankruptcy, which has historically not been a realistic option for many small business owners. Under Chapter 11 reorganizations, business owners may be able to extend their timeframe for payment of unsecured tax debts for up to five years.

The CARES Act bankruptcy code changes are scheduled to expire in March 2021, as of the date of this article. Talk to your attorney to explore whether and to what extent these changes could benefit you if you are planning on filing a bankruptcy petition before these beneficial Chapter 11 code changes expire.

Bankruptcy And Taxes: Qualifying For Discharge

How Does Bankruptcy Affect My Liability to the IRS?

Whether you can discharge tax debt will depend on the type of tax, how old the tax debt is, if you filed a return, and the type of bankruptcy. Federal income taxes in Chapter 7 are dischargeable if you meet all of the following conditions:

  • The discharge is for income taxes: Payroll taxes and penalties for fraud are not eligible for discharge.
  • You filed legitimate tax returns: You filed a tax return for the relevant tax years at least two years before filing for bankruptcy.
  • The tax liability is at least three years old: The tax debt is from a tax return that was originally due at least three years before filing for bankruptcy.
  • You are eligible under the 240-day rule: The IRS assessed the tax debt at least 240 days before you filed for bankruptcy. If the IRS suspended collection activity during negotiation, the applicable date may be extended.
  • You did not commit willful tax evasion: Possible evasive actions include changing your Social Security number, your name, or the spelling of your name repeated failure to pay taxes filing a blank or incomplete tax return and withdrawing cash from a bank account and hiding it.
  • You did not commit tax fraud: The return contains no information that was intended to defraud the IRS.

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The Tax Assessment Was At Least 240 Days Old

Again, this often covers the same ground as the first two rules. The IRS must assess the tax at least 240 days before the taxpayer files for bankruptcy. The IRS assessment can arise from a self-reported balance due , an IRS final determination in an audit, or an IRS proposed assessment that has become final.

In other words, you reported what you owed, or the IRS has officially stated, “This is what you owe.”

What Happens To A Nondischargeable Tax Debt

Income tax debts are treated differently depending on whether you file a Chapter 7 bankruptcy or a Chapter 13 case.

  • Chapter 7 bankruptcy. Except for the automatic stay, bankruptcy cases don’t have much effect on tax debts that can’t be discharged. Once the bankruptcy court issues the discharge, the court clerk will close the bankruptcy case. If the bankruptcy case doesn’t discharge the IRS tax debt, the IRS will be free to resume collection actions.
  • Chapter 13 bankruptcy. If you have nondischargeable IRS debt, you can use a Chapter 13 payment plan to manage it. You’ll propose a plan to pay your IRS debt over a three- to five-year period. You’ll still get the benefit of discharging your older unsecured IRS debt, and your nondischargeable debt will get paid in full.

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