Resolving Bankruptcy And IRS Issues

When job loss, a bad economy, illness, divorce or another setback causes financial problems, many people reduce their tax withholdings and claim extra dependents to increase their take-home pay. When the IRS comes knocking at the end of the year, many people don’t have the funds to pay their taxes.

When you are late on your taxes, interest continuously accrues and late penalties can be applied to your debt. The result is often large, overwhelming tax debts.

At Ford & Semach, P.A., in Tampa, we help individuals and businesses throughout Florida eliminate or reduce their federal tax debts through bankruptcy. Our lawyers understand the laws surrounding bankruptcy and Internal Revenue Service tax debts and know how to make the law work to your advantage.

Discharging Tax Debts Through Bankruptcy

While many tax debts are dischargeable in bankruptcy, some are not. The key is in knowing the difference.

In general, tax debts that are less than three years old are dischargeable in bankruptcy. This includes not only the underlying tax itself but also all associated interest and penalties.

Our attorneys will evaluate your tax debts to determine whether they are dischargeable through bankruptcy. We will then advise you on the debt relief path that is best for you.

Chapter 7 Vs. Chapter 13 For Tax Debts

Both Chapter 7 and Chapter 13 bankruptcy can help with tax debts, but they serve different purposes:

• Chapter 7 may eliminate qualifying tax debts if they meet specific conditions, such as income tax debts at least three years old, filed on time and free from fraud.
• Chapter 13 is a reorganization plan allowing you to repay tax debts over three to five years, including priority and nonpriority debts. You must pay nondischargeable taxes in full, while you may reduce or eliminate dischargeable ones.

The best option depends on your income, assets and goals.

Using Bankruptcy To Halt IRS Collections

Filing for bankruptcy triggers the automatic stay, a robust legal protection that immediately stops IRS collections. While your case is active, this includes wage garnishments, bank levies and certain tax liens.

Although the IRS is a powerful creditor, the automatic stay can give you valuable breathing room to address tax problems through a structured bankruptcy plan. In some cases, it can also lead to removing existing levies or preventing further collection actions.

Debts Discharged During A Short Sale Or Foreclosure

When you surrender your property in a foreclosure or sell through a short sale, your remaining mortgage debt is forgiven. To the IRS, this forgiveness of this debt is considered income and is taxable. There is an exception in the Bankruptcy Code that makes this a nontaxable event. This means that tax debts owed due to foreclosure or short sale can be eliminated through bankruptcy.

At Ford & Semach, P.A., we will help you understand how banks characterize forgiveness debt and the tax consequences of forgiveness and answer your questions regarding debt forgiveness during bankruptcy.

Tax Implications Of Debt Forgiveness

Outside of bankruptcy, canceled debts, such as from credit cards, repossessions or property loss, can result in a 1099-C form from the lender and create a tax liability. Under Section 108 of the Internal Revenue Code, the IRS excludes debts discharged in bankruptcy from taxable income.

This means you do not have to pay income tax on discharged debts when your discharge occurs through bankruptcy.

Strategic Timing For Filing

Timing is essential when using bankruptcy to eliminate tax debt. For example, income tax debts must be at least three years old, with returns filed at least two years prior and assessed at least 240 days before filing to be dischargeable. Filing too early could make those debts non-dischargeable.

Potential Challenges In Tax-Related Bankruptcy

Tax issues in bankruptcy are complex. Pitfalls that can derail your case include:

• Filing too soon and rendering debts nondischargeable
• Failing to classify tax debts as priority or nonpriority correctly
• Overlooking the effect of tax liens that survive discharge
• Running into issues with unfiled tax returns or fraud penalties

These challenges highlight the need for experienced legal counsel. At Ford & Semach, P.A., we work closely with clients to develop tailored strategies that protect against unexpected consequences and maximize the benefits of bankruptcy.

Contact Us For A Consultation

For more information about tax debts and bankruptcy, call our office at 813-302-1258. You can also email us through our intake form.

We are a debt relief agency. We help businesses and individuals file for debt relief under the Bankruptcy Code.