Bankruptcy and IRS Collections

It is a common misconception that IRS tax obligations can never be discharged in a bankruptcy. It is true that if there is tax fraud involved, a tax return was not filed, or the tax was not listed as a liability in the bankruptcy filing, then the tax cannot be discharged in bankruptcy. However, if there was no tax fraud involved and the tax return was filed then there is a point in time when IRS collections can be discharged in a bankruptcy, at which point the IRS can no longer commence tax collection proceedings. When you are going through a bankruptcy, your bankruptcy lawyer should advise you that the IRS must cease all collection actions after bankruptcy has been discharged! The IRS must receive written notification of the discharge.

irs collection

Taxes Are Debts To A Government Agency!

New Mexico Financial Law fully informs our clients on all legal and financial ramifications of their bankruptcy case – especially all of the tax issues (Federal and New Mexico) involved. IRS issues are an important example as to why it is vital that you discuss all bankruptcy issues with a trusted and highly competent bankruptcy lawyer before you file for bankruptcy. If not properly orchestrated, even with bankruptcy protection, you could still be left with substantial debt that could have been cleared.

Bankruptcy and IRS Tax Matters?

Taxes are debts to a government agency much like debts you might have to individuals and companies. They are different from other debts, however, because the governmental agencies collecting these taxes have greater power over you and your property than other creditors have.

Since the bankruptcy code provides for protection to anyone filing bankruptcy, these taxing authorities may have less ability to affect you and your property while you are under bankruptcy protection. The filing of a bankruptcy case may stop collection activity of governmental agencies for the collection of taxes owed. A Chapter 13 bankruptcy can provide for level monthly payment of your tax obligation without additional interest or penalties. Chapter 7 and Chapter 13 can reduce or eliminate certain tax obligations that have been due and payable for more than three years.

Bankruptcy may be the best, or only, solution for extreme financial hardship; however, it should be utilized exclusively as a last resort since it has long-lasting consequences. The record of your bankruptcy will remain in your credit files seen by credit bureaus for up to ten years. It is recommended to consult a financial expert as well as a qualified bankruptcy attorney before resorting to bankruptcy as a means of solving your economic troubles. New Mexico Financial Law works with financial experts regularly.

IRS Allowable Expense Guidelines

Debtors are required to use modified IRS expense guidelines in most cases to determine their ability to make payments pursuant of a Chapter 13 plan. (Sec. 103) Expresses the sense of Congress that the Secretary of the Treasury has the authority to alter Internal Revenue Service (IRS) standards established to set guidelines for repayment plans as needed to accommodate their use under the Bankruptcy Code. Instructs the Director of the Executive Office for U.S. Trustees to report to certain congressional committees regarding the use of IRS standards for determining specified monthly debtor expenses and the impact of such standards upon debtors and the bankruptcy courts.

Debt Relief and the IRS

Bankruptcy proceedings begin with the filing of a petition with the bankruptcy court. The filing of the petitions creates a bankruptcy estate, which generally consists of all the assets of the person filing the bankruptcy petition. A separate taxable entity is created if the bankruptcy petition is filed by an individual under chapter 7 or chapter 11 of the Bankruptcy Code.

The tax obligations of the person filing a bankruptcy petition (the debtor) vary depending on the bankruptcy chapter under which the petition was filed.

Generally, when a debt owed to another is canceled the amount canceled or forgiven is considered income that is taxed to the person owing the debt. If a debt is canceled under a bankruptcy proceeding, the amount canceled is not income; however, the canceled debt reduces the amount of other tax benefits the debtor would otherwise be entitled to.

This information is not intended to cover bankruptcy law in general, or to provide detailed discussions of the tax rules for the more complex corporate bankruptcy reorganizations or other highly technical transactions. For additional tax information on bankruptcy, refer to Publication 908, Bankruptcy Tax Guide and contact Don Harris.

New Mexico Financial Law is an Albuquerque, New Mexico based bankruptcy law firm which provides United States Bankruptcy legal services and advice throughout the state. The majority of its clients reside in the Albuquerque, New Mexico, area, i.e., Albuquerque, Bernalillo, Rio Rancho, Los Lunas and Belen. But the firm can also represent clients statewide in Hobbs, Las Cruces, Clovis, Farmington and other New Mexico cities. Don Harris represents clients who reside in New Mexico and also New Mexico residents residing in out-of-state jurisdictions. Bankruptcy law, as practiced by New Mexico Financial Law, addresses all of a client’s concerns; legal, financial, and emotional. Don attempts to settle bankruptcy cases through negotiation. If negotiation is unsuccessful then the trial skills of Don and his firm are brought into play. Don Harris is a well-known and respected Albuquerque, New Mexico, lawyer. New Mexico Financial Law not only provides the legal bankruptcy advice and guidance expected of an experienced lawyer, he also works with other professionals such as financial advisors, CPAs and mental health counselors to provide the firm’s clients with many of the services needed to get through their financial and personal challenging times.

The hiring of a lawyer is an important decision that cannot be based solely upon advertisements. Before you decide, ask us to send you free written information about our qualifications and experience.

Contact New Mexico Financial Law Today for a Free Initial Bankruptcy Consultation!

Pursuant to 11 U.S.C. §528(A)(4) We are required to state the following: We are a debt relief agency. We help people file for Bankruptcy relief under the Bankruptcy Code.