Posted by LWM Team on Thu, Sep 09, 2010
What is the better option: Bankruptcy or OIC?
If you are having serious problems paying the IRS, bankruptcy or Offer in Compromise can be the way out. One of the most important aspects of choosing either bankruptcy or OIC is how much the settlement amount will be.
Most of the time, you can get the lowest possible settlement amount if you file for a chapter 7 bankruptcy. Here, you need to have assets of little value (which will class it as a ‘no asset’ bankruptcy). The majority of chapter 7 bankruptcies are no asset bankruptcies, since chapter 7 means you have probably ended up at in the worst financial state possible.
So long as you meet three criteria, you will owe the IRS nothing under a “No Asset Chapter 7 Bankruptcy”. These three criteria are as follows:
1. The debt you have to the IRS is in the form of income tax.
2. The bankruptcy was filed at least 2 years after the tax return.
3. All returns you owe money for were filed at least 3 years before you filed for the bankruptcy.
The other type of bankruptcy, a chapter 13 bankruptcy, implies you have the ability to pay the IRS in monthly instalments (either over a 3 or 5 year time period). Many people might go for a chapter 13 over an instalment agreement to avoid the penalties and interest they gather otherwise, which can be a real burden.
As for an offer in compromise, two things are taken into account when the IRS is deciding whether to allow it.
1. Amount of your future cash flow will be.
2. The value of your assets.
If these are above a threshold, they will not allow an OIC. Problems can arise here when the IRS doesn’t take into account certain ‘un-allowed’ expenses, meaning your cash flow is lower than they see it as.
So, when deciding whether to go for bankruptcy or OIC, you really need to think about your expenses and assets, and consider how the IRS is going relate these things to your ability to pay them.
Posted by LWM Team on Fri, Jul 23, 2010
Taxes and Chapter 7 Bankruptcy
If you want to file for bankruptcy it is essential you filed the previous four years’ tax returns beforehand. You must also be aware not all debt can be put aside by bankruptcy. If you want to know if bankruptcy can help your tax debt troubles you have to read through some complex rules.
Taxes That Can Be Eliminated in Chapter 7 Bankruptcy
In the instance of Chapter 7 Bankruptcy an individual or married couple can have their taxes discharged or erased in special conditions.
A discharge of income taxes in a Chapter 7 can take place if all of the following are accurate:
- Bankruptcy can only do away with incometaxes and not fraud penalties, payroll taxes or Trust Fund Recovery Penalty.
- You have not submitted a false tax return or knowingly tried to evade the payment of tax money. This is relevant if you were given a penalty for fraud.
- Taxes must be due a minimum of three years prior to filing for bankruptcy. Normally three years from 15 April, of the year the return was owed. However, an extension must be filed from 15 October. If the 15th is a Sunday or a Saturday the return was due on Monday.
- You must have filed all tax returns a minimum of two years prior to filing for bankruptcy. An alternate return by the IRS on your behalf is not valid for this purpose. Unfiled tax returns means the discharge of taxes owed in that year of bankruptcy is not allowed. You are allowed to encompass those taxes within a repayment plan.
- The IRS must have reviewed the income taxes a minimum of two hundred and forty days prior to the appeal being filed.
If you want your tax debt to be eligible for discharge in bankruptcy then if any of the following is relevant, time must be added to two year, three year or 240 day regulations:
- All of the time periods i.e. two year, three year and 240 days halt during the time you filed a prior case for bankruptcy. If you did file previously you must add another one hundred and eighty days to the three time periods.
- The 240 day rule can be postponed by a Compromise in Offer. The stay begins on the date the offer is made. It remains until the offer is refused by the IRS or withdrawn by the tax payer. Thirty days is added for any period affected by a petition.
- A time period rule is lengthened by sixty days following a decision or dismissal by the US Tax Court.
Prior to filing for bankruptcy for tax debt get a record of your filing dates from the IRS. This record is known as MFTRA-X or a literal transcript printout. You need the years on which you owe money. You will see important tax dates like filing of returns, tax reviews and time changes. Scrutinize the dates on the transcript prior to a bankruptcy filing. The printout is free of charge.
Federal Tax Lien and Chapter 7
Prior recordings of tax liens on your record are a problem even if you are eligible for a Chapter 7 discharge. The problem is they stay on your record. It is solely your private responsibility to settle tax owed. A lien prior to you filing for bankruptcy outlives a discharge. Your property includes equity where the lien can be affixed.
The IRS is allowed to seize assets in your possession at the time you filed bankruptcy once your bankruptcy has ceased. An IRS lien can harm you if you have a pension plan or real estate.
Posted by LWM Team on Thu, Jul 22, 2010
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Filing for bankruptcy can do away with or lower tax debts. On the other hand, it can force the IRS to accept a payment plan or it can simply get you more time. Bankruptcy could be the means to lessening your tax woes but make sure you are aware of any recent changes to the laws governing bankruptcy.
Bankruptcy Categories
Bankruptcy should be seen as a lawful procedure. It can be used to organize and resolve debt problems. It slots in tax debt. In this case you file an appeal with the Federal Bankruptcy Court. There are two kinds of bankruptcies:
- Chapter 7 i.e. Straight Bankruptcy – an insolvency of debts, it can waive all or some of your income taxes.
- Chapters 11, 12 or 13 i.e. Repayment Plans – permit payment of debts and tax debts over a time period of that is extended and frequently pay less than you owe.
The Automatic Stay
There is a lawful safe haven known as the automatic stay. This is halts all creditors and collectors as well as the IRS as soon as you file for bankruptcy.
If a creditor wants to collect during a bankruptcy case he must get a removal, lift or stay from the bankruptcy judge. It is very seldom the IRS makes such an application.
Bankruptcy Negatives
There is a downside to consider before filing for bankruptcy:
Additional Time for IRS to Collect
If not all your tax debt is removed after bankruptcy the IRS gets additional time to collect the outstanding monies owed by you. Ten years is the usual time they have to get interest, penalties and tax bills from you. When your time of bankruptcy has ended, the remaining time of the initial ten years for collection has the pending period of your bankruptcy case added on for the IRS.
Your Credit Rating and Tax Liens
When you file for bankruptcy it is in the public record and it shows on your credit history for ten years.
If the state taxing authority or the IRS documented a tax lien notice it harms your credit report. However, a bankruptcy filing does prove you are attempting to sort out your debt troubles.
Posted by LWM Team on Thu, Jan 07, 2010
Many taxpayers consider bankruptcy with the intent of being released from their tax debt. Tax relief may be thought of by some as motivation for bankruptcy, but going through with filing should be avoided if at all possible. When using bankruptcy as a form of tax relief, there are some essential facts that should be understood.
Filing for bankruptcy is one option for alleviating tax debt; however, it is not recommended. Taxpayers who are considering Chapter 7 bankruptcies should be sure they have all of the facts before doing so. Your odds of being released of your tax debt through a Chapter 7 can-in reality-be rather slim, not to mention that this is a rather costly method of eliminating tax liabilities. This route should be your absolute last resort after exhausting any and all other options available to you; in other words, "Plan Z" on your list.
Filing a chapter 13 bankruptcy is also a method that should be used as a last resort. With a Chapter 13 bankruptcy, the IRS can work out a payment plan for taxes owed. With this action, debt owed to the IRS is never forgiven, just delayed through a long series of painstakingly extended payments. Not only is bankruptcy in any form less promising than other more moderate tax relief methods, but it can also ruin your credit. On the other hand, if you have serious credit issues already, you may see no harm in filing bankruptcy.
You must understand that bankruptcy was not designed as a bandage or cure for tax issues. Certain laws allow the IRS to collect on back taxes even if a bankruptcy is in effect. It is all quite complicated, even when broken down into layman's terms. Tax relief is one of those areas that you do not want to guess on. One wrong move could leave you in a worse situation than the one you were initially trying to get yourself out of.