Reno Tax Debt
The bankruptcy attorneys at Darby Law Practice, Ltd. can help you deal with your tax debt, including understanding which kinds of tax debt are dischargeable in bankruptcy and which kinds aren’t, other options for dealing with tax debt, and the tax consequences of a bankruptcy discharge versus a debt settlement or other form of debt cancellation.
Tax Debt Dischargeable in Bankruptcy
Most tax debt is not dischargeable in bankruptcy. Federal income tax debt is dischargeable, but only if it meets certain conditions. For instance, the debt must relate to a tax return with a filing deadline that is more than three years old, including extensions. Also, the tax return that the debt relates to must have been filed at least two years ago, and the tax assessment itself must be at least 240 days old. Finally, the debt is not dischargeable if the tax return is fraudulent or if the taxpayer is guilty of tax evasion.
Even if the tax debt is not dischargeable, bankruptcy can still be of great help. First of all, the automatic stay puts an immediate stop to all collection efforts as soon as the bankruptcy is filed. Then, if filing a Chapter 11 or Chapter 13, you can arrange to pay off the debt in a payment plan over three or five years without incurring any further interest or tax penalties.
Non-Bankruptcy Options for Dealing with Tax Debt
You also have options outside of bankruptcy for dealing with the tax debt, including working directly with the IRS. You may be able to set up a payment plan, or negotiate an offer in compromise, whereby the government agrees to accept a lesser amount in satisfaction of the debt. An offer in compromise is often available where a legitimate dispute exists about the tax liability, if it is unlikely that you will be able to pay the debt, or if colleting the full amount would be unfair or cause a hardship. Regarding payment plans, the IRS is usually quite reasonable in setting up a payment plan and is patient so long as you stick to the plan and stay in contact with them.
Tax Consequences of Discharged Debt versus Settled Debt
In general, if you are liable for a debt that is canceled or forgiven, you must include the canceled amount in your gross income on your federal income taxes. For instance, if you negotiate a debt settlement for less than the amount you actually owe, or if you go through a foreclosure or short sale and the lender cancels your liability for the deficiency, you are required to report that canceled amount that you did not have to pay as income to the IRS. In contrast, any debt discharged in bankruptcy is not treated as income. Bankruptcy, therefore, allows you to cancel out a greater portion of a debt without any tax consequences compared to a non-bankruptcy option.
Reno Tax Debt
Whether you are dealing with a specific tax debt or seeking to cancel any debt through bankruptcy or other means, it is important that you and your attorney understand and consider the tax ramifications of your actions in the overall big picture. In Reno, contact Darby Law Practice for practical legal advice and professional assistance.