Often taxpayers that were debtors in a dismissed or discharged bankruptcy will continue to have tax problems after bankruptcy. Frequently the debtor is unaware the Internal Revenue Service and other taxing authorities claims have not been discharged and are ready to collect the remaining liabilities. Representation of these taxpayers is different than other taxpayers and often quite challenging.
Normally, there are several options available to a taxpayer to resolve a tax problem. These methods include payment in full, an installment agreement, filing of an offer in compromise, Chapter 7 bankruptcy, and Chapters 13 or 11. A debtor having exercised bankruptcy options must carefully choose the options remaining after the filing of a bankruptcy. The options will change based upon whether the debtor received a discharge in the bankruptcy or was dismissed.
A debtor granted a discharge in a Chapter 7 is not eligible for another discharge in Ch. 7 for eight years. See 11 U.S.C. 727(a)(8). A debtor granted a discharge in a Chapter 7 is not eligible for another discharge in Ch. 13 for four years afterwards. See 11 U.S.C. 1328(f)(1). A debtor granted a discharge in a Chapter 13 is not eligible for another discharge in Ch. 13 for two years afterwards. See 11 U.S.C. 1328(f)(2).
Debtors dismissed after filing Chapter 7, Chapter 11, or Chapter 13 may file a second bankruptcy if the dismissal is without prejudice to filing. The attorney must be careful to timely file motions to continue the stay or the automatic stay will automatically lift or not be imposed.
Post-petition and priority taxes are not discharged after the filing of bankruptcy. The IRS will often fail to correctly determine if taxes were discharged.
Filing the bankruptcy extends the statute of limitations for collection for the time in the bankruptcy and for six months thereafter. See 26 U.S.C. 6503(b). The original statute of limitations for collections is 10 years after the date of assessment.
Taxpayers receiving a dismissal of their bankruptcy will still owe their creditors. Payments under a reorganization that is dismissed may be reapplied under normal rules and not under the plan of reorganization. Therefore, dismissal frequently results in application of the payments received to the least favorable liabilities owed to the taxing authority.
Taxpayers that have perfected liens that attach to exempt assets may be surprised that the IRS still seeks to collect after discharge. This is because the federal tax lien preempts state property exemptions as well as some taxes may not be dischargeable. Review of the debtor's schedules may help to determine the amount of the tax debt surviving the bankruptcy.
Taxpayers may still qualify for installment agreements, offers in compromise, innocent spouse and other forms of relief from immediate seizure or levy after bankruptcy. It is important to remember that the taxpayer should also consider the filing of a Chapter 13 even if a previous discharge was received. The living standards applied by the IRS in evaluating allowable living expense may or may not produce a higher payment than a Chapter 13.
Taxpayers who have been dismissed from their bankruptcy may be forced into negotiations for an installment agreement if the dismissal was with prejudice or face levy or seizure. Often the IRS is not the only creditor and seeking an offer in compromise will not resolve other debt issues. A bankruptcy after dismissal may be a preferable choice as the bankruptcy will be a broader form of relief and deals with all creditors. The debtor may have to wait for the prejudice period to expire prior to filing.
It is very important to review the IRS transcripts to determine the effects of the bankruptcy on taxpayer’s account. Transcripts will also show current balance, dates tax returns were filed, dates liens were filed, and subsequent assessments of tax. Transcripts are easily obtained from the IRS. A power of attorney, form 2848, is required to access client information and to represent the taxpayer. Additional important information may be obtained under the Freedom of Information Act.
Taxpayers must be careful to quickly review their tax liabilities and their bankruptcy schedules to determine the best choices for dealing with tax liabilities after bankruptcy. Failure to be in compliance in filing returns with the taxing authority may severely limit options for negotiations. Acting quickly may save unpleasant consequences and help to minimize the amount to be repaid to the IRS or other tax authority. Attorneys should work closely with their clients to obtain results that benefit their client.
Bio: William F. Kunofsky CPA JD practices primarily in Tax Representation and Bankruptcy and can be reached at 214-369-1040.
This article is not intended as legal or tax advice. Readers are requested to seek legal counsel for advice. This article is for educational purposes only. Copyright ©2011 William F. Kunofsky. All Rights Reserved.
Copyright © 2012 William F. Kunofsky. All Rights Reserved.
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