Thursday, November 10, 2005

Bankruptcy Act is a Mixed Bag for Taxpayers

While some taxes are discharged in bankruptcy, not all are. For example, income taxes cannot be discharged if they are from tax returns due within three years of the bankruptcy petition filing date, or if they are assessed or assessable within 240 days of the petition. In the past, taxpayers have used offers in compromise and successive bankruptcy filings to get more taxes covered by the discharge. The new bankruptcy laws restrict these strategies by suspending the running of the time periods and adding additional days in these situations. The new law also resolves an existing uncertainty in the law by unequivocally providing that the "automatic stay" provisions that apply to tax issues do not apply to post-petition taxes.

There are some rule changes that benefit taxpayers. One change is that the IRS needs to file a timely claim for nondischarged taxes in Chapter 7 bankruptcies. This was not the case in the past. Another benefit of the new law is that which allows tax authorities to set off pre-petition tax refunds due to a debtor against pre-petition taxes owed by the debtor. This benefits debtors because it stops interest from accumulating on pre-petition taxes due by the debtor and set-offs of other debts are not normally allowed by the bankruptcy court.

Source: New Law Toughens Rules for Avoiding Taxes Through Bankruptcy, Practical Tax Strategies, Nov 2005 by Randall K. Hanson and James K. Smith
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