With tax season around the corner, it is crucial to know how declaring bankruptcy affects your taxes. Here are some ways that bankruptcy can change the way you report, file and pay taxes.
What are the tax implications of filing Chapter 13 bankruptcy?
Make sure to have your paperwork in good order before filing for bankruptcy. It is a requirement to file all tax forms for the four years most recent to your planned bankruptcy filing. While in bankruptcy, you need to pay current taxes promptly and file all returns or request filing extensions. If you don't keep up with the tax paperwork and pay current taxes, get dismissed.
I've filed all my tax paperwork, but I can't pay off all the taxes I owe. What can I do?
You must make arrangements with the Internal Revenue Service (IRS) to avoid a federal tax lien or an IRS levy action. Avoid a collection process by the IRS by establishing a payment agreement or initiating an offer in compromise application.
How is a payment agreement with the IRS different from an offer in compromise?
A payment agreement sets a monthly payment schedule to pay your tax bill. If you already have an IRS lien against you, it will remain in place throughout the up to ten year payback period.
An application for an offer in compromise needs to contain a payment of 20 percent of your total taxes due. If the offer in compromise is accepted, any outstanding IRS liens are immediately removed even though you have yet to make several more tax payments.
What are tax-related considerations under a Chapter 7 bankruptcy?
Be careful going forward after your bankruptcy is complete. With the proper withholding exemptions in place, you are unlikely to accumulate additional debt tax debt. Your commitment to making the most of an opportunity to get out of debt will be rewarded.