What to Know about Declaring Bankruptcy with the IRS
Bankruptcy may be an option if you cannot pay your past-due federal taxes. Other options include an Internal Revenue Service (IRS) payment plan or an offer in compromise. Chapter 7 and Chapter 13 are some of the most common types of bankruptcy for individuals.
Before filing for bankruptcy, you need to remember the following:
- You will need to file all tax returns that are due for the four years before you file for bankruptcy.
- You must keep up with all required filings during your bankruptcy or get an extended time to file.
- You should pay your taxes as they come due during your bankruptcy case.
- If you don’t file your taxes or pay them while going through bankruptcy, your case might be dismissed.
Notifying the IRS
If you include the IRS as a creditor in your bankruptcy filing, the IRS will be notified of your case by the U.S. Bankruptcy Courts within a few days. You can call the Centralized Insolvency Operation at 800-973-0424 to confirm that the IRS has received notice of your bankruptcy case.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is when a person or business can get relief from some or all of their debts. A trustee oversees the process and converts the debtor’s assets into cash to pay creditors. Chapter 7 bankruptcy can provide relief regardless of the amount of debt owed or whether the debtor is solvent or insolvent.
If you are filing bankruptcy because you have overdue federal tax debts, you need to make sure that you do not continue to incur additional debt. This means that you should increase your withholding and your estimated tax payments.
If you are in bankruptcy, you may still receive your tax refund. However, the refund may be subject to delay, or it may be used to pay down your tax debts. You can check the status of your refund by using the “Where’s My Refund” tool on the IRS website or contacting the IRS’ Centralized Insolvency Operations Unit at 1-800-973-0424.
At the end of your Chapter 7 bankruptcy, you will be released from having to pay back certain debts. This is called a “discharge of debt.” Some taxes may be included in this discharge of debt. Whether or not a federal tax debt can be discharged depends on each case’s specific facts and circumstances.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy allows you to reorganize your debts and repay them over time. To qualify for this type, you must have a regular income and meet specific other requirements set forth in the bankruptcy code.
If you are considering filing for bankruptcy, it is crucial to be aware of the potential consequences and take steps to minimize the impact on your life. One of the most important things to do is to make sure you do not incur any more debt, as this can impact your ability to get a fresh start. If you have overdue federal tax debts, you may need to take steps to increase your withholding or your estimated tax payments to ensure you are in compliance with the law.
If you finish your bankruptcy plan, you’ll get a discharge of debt. This means you’re no longer responsible for certain obligations. Some taxes may be dischargeable. Each case depends on whether a federal tax debt can be discharged. Ask your bankruptcy attorney to see if any of your tax debts can be discharged.
Both types of bankruptcy have unique pros and cons, so it’s important to talk to a bankruptcy attorney to see which one is right for you. In general, Chapter 7 is better for those with a lower income, while Chapter 13 is better for those with a higher income.
No matter which type you choose, it will have a significant impact on your credit score and ability to get credit in the future. Understanding all of the implications of bankruptcy is vital before you make a decision.
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