Taxation & Estate Planning

What you should know about bankruptcy & taxes

By Darrin Mish

If you have filed for bankruptcy or are planning to, you should know there is a mountain of paperwork involved.  You will need IRS help to figure out the taxes and methods of calculation for taxes you will owe as a result of filing for bankruptcy.  Fact: filing for bankruptcy does not mean you won?t owe any taxes for that year.

When you file a petition for bankruptcy, that act creates a bankruptcy estate.  A bankruptcy estate is composed of all assets of the petitioner.  If you are filing bankruptcy as an individual, under Chapters 7 or 11, a separate taxing entity is formed.

When a debt is forgiven or cancelled, the IRS considers that amount as income to you, which is taxable.  If, however, the debt is cancelled through a bankruptcy proceeding, the amount cancelled is not considered income.  Nevertheless, the amount of the cancelled debt reduces the amount of other tax benefits you would normally have accessible to you.

When you file for bankruptcy, you retain an obligation to file an income tax return.  This is just one more reason why you should enlist professional help by calling our office to help you sort through the maze of paperwork, rules, and regulations that can cause you to incur IRS problems.

When you file for bankruptcy, you can choose to end your tax year the day before you file your petition.  This will permit the tax due on that shorter taxable period to be filed as a claim against the bankruptcy estate.

INFORMATION YOU WILL NEED TO KNOW

Tax procedures will need to be followed to determine the amount of tax you, or the bankruptcy estate, owe.  Also, paying the tax claim and receiving a discharge of tax liability are issues for which you will need IRS help.

As an individual debtor, you will need to file a Form 1040 for the tax concerned.  The trustee of your bankruptcy estate will need to file a Form 1041.  Other instances might involve Form 1120.  This is all part of your Determination of Tax. The IRS can discharge the liability of paying tax for the estate if they deem that action to be appropriate and certain criteria have been met.  For IRS help with these forms and any questions, contact one of our professional tax consultants.

You can request a prompt determination of any unpaid tax liability through a written application.  The IRS must then notify the trustee of the bankruptcy estate within sixty (60) days of receipt of the application whether or not the return will be accepted as filed or if further examination of the tax return is required.

The bankruptcy court typically has the jurisdiction to decide the amount of tax imposed on the debtor or estate and whether that amount is fair and legal.  This amount will also include any penalties or fines in addition to a tax amount assessed.

You will need IRS help discerning the difference between what you owe and what you don?t on your tax return, so let our professional and friendly staff help with your IRS problems.

Full post as published by IRS Problem Solver Blog on June 05, 2008 (boomark / email).