Arizona Bankruptcy Lawyer Blog

The "small business" is suffering in today's economic climate. Many have debts that are insurmountable. The "owner" has often also personally guaranteed the debt and is facing bankruptcy.

The question then becomes whether the business entity should file for chapter 7 as well?

Maryland Bankruptcy Attorney Brett Weiss has short list of reasons why he thinks a corporation or LLC will end up using a chapter 7 bankruptcy. His article can be found here.

The three in short form are as follows:

1. The attorney who suggests using a chapter 7 bankruptcy for the LLC or Corporation doesn't understand that a bankruptcy discharge is not available for the entity.

2. If tax debt would be paid first from assets that a chapter 7 trustee would "gather" thereby preventing personal tax debt in the future. The common scenario in the regard is the LLC or Corporate entity that owes employment tax, that may later be assessed as a trust fund recovery penalty against the owner.

3. For purposes of "fairly" distributing assets in an attempt to reduce the chance that a creditor will continue collection activity against the entity.

The process of determining who or what should file for bankruptcy is rarely simple. If you are associated with an LLC or Corporation with significant debt, contact an experienced bankruptcy attorney.

If you have serious income tax debt, you have 5 ways to deal with it:

1. Challenge the Assessment

Challenge the amount of the tax by filing correct returns, amending returns, appealing the audit results, litigating the audit results etc.

2. Statute of Limitations Defense

The IRS has a limited period of time to collect debt. If it doesn't collect within this period, it is generally, out of luck. Many taxpayers are able to use this to their advantage, especially in combination with non collectible status or installment agreement arrangements.

3. Installment Agreement/Non Collectible Status

The IRS must typically allow a taxpayer to set up a monthly payment on what is owed if the taxpayer will comply with a few requirements. The amount paid does not have to be enough to pay the tax debt off within the statute of limitations period. In fact, the amount paid monthly may be nothing. It all depends on the taxpayers ability to pay. This number is based on how much the government will agree that you need to live on, subtracted from your income. Assets are taken into account as well.

These programs are used to pay the debt in full over time, OR to get the taxpayer to the statute period mentioned above. In our office, they are also often used to buy time until the tax debt can be considered "dischargeable" or can be wiped away in bankruptcy.

Continue reading "Bankruptcy is one option to deal with tax debt" »

Yes. Income tax debt can be wiped away in bankruptcy.

The catch? The following requirements:

Basic Requirements:

1. The taxes must have become due more then three years prior to the bk filing. This means that you should count forward 3 years from the date the return was actually due. (Think April 16th plus 3)

2. The original return must have been filed more than 2 years before the bankruptcy. 2003 return filed June of 2007? The two year date would end up in June of 2009. What constitutes an "original return" can be a complicated issue so if the IRS filed a "substitute" return before you filed your own return, make sure and tell this to your lawyer.

3. The IRS must have "assessed" the tax more than 240 days before the actual filing of the bankruptcy. Assessment means that they entered it in their system as due and owing.

4. No fraudulent tax return. This will kill the dischargeability.

5. No effort to evade the tax. This may as well.

Many of my clients have serious tax debt as a result of late filed returns. Despite other options (offer in compromise) bankruptcy often ends up being the best option overall.

Even if the tax debt is considered dischargeable one big caveat remains. The IRS lien.

The IRS will typically record a tax lien with the County in which you or your property "resides". If the property has value, the lien remains "attached" to it after the bk (chapter 7) or during the bk (chapter 13). In a chapter 7, the lien still has value after the case is over.

In a chapter 13, the value of the lien must be paid through the plan.

Often, the result in both cases is that the underlying tax debt is gone, but the lien is worth as much as the IRS was owed to begin with.

If you are getting ready to file for bankruptcy and have tax debt, make sure and have your attorney review the lien(s) and compare them to your asset values to avoid a surprise.

There are 5 common legal options for those with serious income tax debt. The taxpayer can:

1. Challenge the IRS assessment

Challenge the amount of the tax by filing correct returns, amending returns, appealing the audit results, litigating the audit results etc.

2. Use the "Statute of Limitations" to their advantage

The IRS has ten years to collect the tax from the date of assessment plus any time added on by virtue of bankruptcy, collection due process appeal, offer in compromise etc. Many taxpayers are currently on a low payment plan or non collectible status and simply need to wait a bit longer to remove the debt.

3. Use a partial pay "installment agreement" or "non collectible status"

A partial pay installment agreement or non collectible status can be used to pay less then what is owed to the IRS while the statute of limitations continues to run OR until the tax debt becomes dischargeable in bankruptcy.–

4. Offer in compromise –

The proverbial “Oz” at the end of the “yellow brick road”, the successful offer in compromise will allow the taxpayer to settle the tax debt for less than what is owed and often pay the reduced amount over time. If the taxpayer is a "good candidate" and few other debt problems, this is usually the first and best choice. Unfortunately, most taxpayers don’t qualify and/or have significant other debt.

5. Bankruptcy

Income tax debt becomes dischargeable in bankruptcy with some careful planning. Many of our clients with higher income and large consumer and tax debt, use an installment agreement in combination with a bankruptcy to deal with all of their debt.

A well planned bankruptcy can also help the tax debtor in his or her offer in compromise. The IRS is supposed to consider the amount they would receive via bankruptcy in determining the amount of the offer in compromise settlement number.

Many call bankruptcy the "silver bullet” of tax defense, and with good reason. It is so powerful that anyone with serious tax debt has to at least consider it as an option.

We have helped clients rid themselves of millions of dollars in tax debt via the bankruptcy code. (Visit the case examples page )

If you have significant tax debt, please contact an attorney well versed in tax motivated bankruptcy and it’s benefits.