Navigating the intricate world of bankruptcy can be difficult, particularly when it comes to comprehending the tax implications. Chapter 11 bankruptcy is a powerful instrument for reorganizing individuals and enterprises and regaining financial stability. However, it is critical to understand how this process impacts taxes and plan properly. In this blog article, we’ll look at the tax consequences of Chapter 11 bankruptcy and provide useful information to help individuals and companies make informed decisions.
What is Chapter 11 bankruptcy?
Also known as a “reorganization” bankruptcy, Chapter 11 bankruptcy is much more complicated than its counterparts. Chapter 11 bankruptcy is a type of bankruptcy in which you keep your financial assets and exempt property. Unlike Chapter 7 bankruptcy, you are the appointed trustee in this sort of bankruptcy case. Additionally, you can borrow new money. With Chapter 11 bankruptcy, some taxes can be discharged, but it varies per situation. Failure to properly reorganize and obtain approval for a debt repayment plan may result in the conversion of a Chapter 11 case to a Chapter 7. In this case, assets are liquidated to pay off debt.
What happens to tax debt after filing for Chapter 11 bankruptcy?
Chapter 11 bankruptcies typically do not discharge tax debt. In Chapter 11, pre-petition tax liabilities are categorized as “priority claims.” These claims must be paid in full, and tax officials are usually given priority over other creditors. However, there are circumstances where taxes can be considered a “dischargeable debt” that may be forgiven through bankruptcy. The amount of tax debt that can be erased is determined by a variety of factors, including the type of tax owed, the length of time the tax obligation has been outstanding, and the corporation’s or individual’s financial means.
Filing Tax Returns After Bankruptcy
Businesses must continue to file their tax returns as required by the IRS under Chapter 11 bankruptcy. Failure to meet these duties may result in penalties and audit risks. It’s critical to work with a skilled tax professional to ensure timely and accurate filing of tax returns, as noncompliance may stall the bankruptcy process and cause further legal issues. While in bankruptcy, you can still obtain tax refunds. However, refunds may be delayed or used to pay off tax debts.
Tax Help for Bankruptcy Filers
Throughout the bankruptcy process, it’s crucial that you remain compliant with the IRS, specifically with tax filing and reporting. Failure to file tax returns on time and correctly may result in penalties and other problems. Also keep in mind that if you do declare bankruptcy, you may have additional reporting requirements, such as alerting the IRS of your bankruptcy filing. Given the complexities and potential tax ramifications of bankruptcy, it is strongly advised to seek professional advice. Consulting with tax professionals as well as bankruptcy attorneys will provide you with the information you need to successfully navigate the process. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
Bankruptcy is an exhausting process that individuals and corporations may have to go through when they are overburdened by financial obligations. While it provides the opportunity for a fresh start, it is critical to be mindful of the tax implications. In this blog article, we will discuss the tax implications of bankruptcy, assisting you in understanding the potential penalties and providing guidance to help you navigate this complex scenario.
Taxes After Bankruptcy
The discharge of debts is one of the key benefits of bankruptcy. It allows people or organizations to erase or restructure their financial commitments. It is important to note, however, that not all obligations, including certain tax debts, are immediately forgiven. Much of it will depend on which type of bankruptcy you file for.
What is Chapter 7 bankruptcy?
Chapter 7 bankruptcy is commonly known as “liquidation bankruptcy” or “straight bankruptcy.” It’s a legal procedure that allows individuals or corporations to start over financially by erasing the majority of their debts. It is the most common type of personal bankruptcy in the United States. A trustee is appointed in Chapter 7 bankruptcy to oversee the proceedings and manage the debtor’s assets. The primary function of the trustee is to identify any non-exempt assets that can be sold or liquidated to repay creditors.
What happens to tax debt after filing for Chapter 7 bankruptcy?
Income taxes can be discharged by filing Chapter 7 bankruptcy if you meet certain requirements including:
Your tax debt is income based (either federal or state)
You did not intentionally evade making tax payments and all actions were lawful
Your tax debt is at least 3 years old
You filed a tax return at least 2 years before filing for bankruptcy. Late returns and substitute returns filed by the IRS generally do not count.
The taxes in question were assessed at least 240 days before filing for bankruptcy
You must note that any tax liens recorded before the bankruptcy will remain in effect. You will still need to pay off the tax lien when you sell the property with the lien attached to it.
In addition, property taxes owed before the bankruptcy is filed will still be owed. Taxes other than federal and state will also still be due, including FICA, Medicare, sales tax, etc. You should also expect to continue paying certain employment taxes and penalties.
Filing Tax Returns After Bankruptcy
When filing, you will use Form 1040 for your individual return and your appointed trustee will file Form 1041 on your behalf, which is the U.S. Income Tax Return for Estates and Trusts. You may receive Form 1099-C, Cancellation of Debt from creditors that canceled $600 or more in debt on your behalf. Typically, any canceled debt should be reported on your tax return as taxable income. However, having debt forgiven through bankruptcy typically exempts an individual from paying taxes on the canceled debt. When your debt is discharged through bankruptcy, you’ll need to file IRS Form 982, About Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness to inform the IRS of your discharged debt that should be excluded from your taxable income.
Tax Help for Bankruptcy Filers
Compliance with tax return filing and reporting duties is critical throughout bankruptcy. Failure to file tax returns on time and appropriately might result in penalties and further issues. Furthermore, if you file for bankruptcy, you may have extra reporting duties, such as notifying the IRS of your bankruptcy filing. Given the intricacy and potential tax implications of bankruptcy, it is strongly advised to obtain expert guidance. Consulting with both tax professionals and bankruptcy attorneys will give you the knowledge you need to successfully navigate the process. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
IRS enforcement has cooled in the years following the COVID-19 pandemic, but the 2022 Inflation Reduction Act is equipping the agency with over $45 billion for tax enforcement. With high interest rates in place, now is an even worse time to owe the IRS. Here is an overview of back taxes and how to get rid of them.
What are back taxes?
Back taxes are unpaid taxes from a previous year. For example, if you had a tax bill of $1,000 after filing your 2021 tax return and did not pay it, you owe back taxes. Not only would you owe the $1,000, but you would also owe any penalties and interest that accrued on this tax bill. You can owe taxes by not reporting all earned income, not filing a return, or filing but failing to pay your tax bill.
What happens if I don’t pay back taxes?
Unpaid taxes will result in an IRS notice, which is a formal letter from the IRS. Typically, the notice will advise the taxpayer to pay the balance owed within 21 days. If the balance is still unpaid within 60 days, the IRS will likely proceed with collections. While the IRS is awaiting payment, the tax balance will accrue interest and penalties.
How do I get rid of back taxes?
If you do find yourself in the unfortunate situation of owing the IRS, there are some options for how to pay your back taxes. If you cannot afford to pay, you still have options. It’s important to know that there are always options and the worst thing you can do is ignore the issue.
Pay your taxes
This is the most straight-forward solution to getting rid of back taxes. If you can afford to pay off your tax balance, you should do it immediately to avoid additional penalties and interest. IRS interest rates are high right now, making your tax bill more expensive than it would’ve been in previous years. You can pay your tax bill with a credit or debit card through your online IRS account, by phone or even on the IRS mobile app. If you don’t have enough to cover the balance, you can request a short 120-day extension with the IRS. This option doesn’t stop interest or penalty fees, but it will allow more time to pay the tax debt in full. Even borrowing from your retirement fund or taking out a personal loan might be a better option than allowing your tax balance to grow.
Request an Installment Agreement
You can request an installment agreement, or a monthly payment plan, with the IRS. With this option, the 0.5% monthly penalty will be reduced to 0.25% until the balance is paid off. Interest will continue to accrue until the balance is paid. If you cannot pay your back taxes within 120 days and you owe less than $50,000, this might be the best option for you. Taxpayers should note if they do not pay according to the IRS’s set schedule, they can void the installment agreement and proceed with enforcement.
Apply for an Offer in Compromise
In some cases, the IRS may settle your tax debt for less than the amount you owe with an offer in compromise (OIC). This is understandably the most sought-after option to get rid of back taxes, but it is also rarely approved by the IRS. To qualify, taxpayers need to prove that paying off their tax debt would result in financial hardship according to IRS standards. They also need to be current on all tax returns and cannot be in bankruptcy. Applying requires an application fee, which can be waived if you are a low-income taxpayer and an initial nonrefundable payment. Your debt will also still accrue interest while your application is reviewed.
Tax Help for Taxpayers with Back Taxes
Having unpaid back taxes can cause severe stress and dealing with the IRS on your own can be intimidating and time-consuming. A knowledgeable and experienced tax professional can help you understand your options better and do the heavy lifting when trying to get rid of your back taxes. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
A new year could mean a financial fresh start. The IRS Fresh Start program was created to help struggling taxpayers and small businesses. In 2023, taxpayers are still asking how the program works. Here are some key details about the program.
The History of the Fresh Start Program
The Fresh Start Initiative was established in 2011 to give first-time tax offenders leniency and the opportunity to solve their tax issues through consolidated tax bills and payment arrangements. Shortly after launching the program, the IRS made it easier to remove federal tax liens. It also allowed taxpayers to come to more favorable payment arrangements with the IRS. One year after that, the IRS gave more taxpayers access to the Offer in Compromise (OIC) program.
Changes to Federal Tax Liens and Installment Agreements
The IRS used to file tax liens on balances above $5,000. The Fresh Start program increased the tax balance limit to $10,000. It also gave taxpayers the chance to withdraw their lien, which then helped those taxpayers access more credit.
Streamlined installment agreements (SLIAs) were also expanded in 2011 that allowed more favorable terms for the taxpayer and helped avoid tax liens. This allowed taxpayers with debt of up to $50,000 to be set up with a SLIA, up from the previous $25,000 cap. Further, the term length was increased from 60 months to 71 months. The simple installment agreement is preferred for most taxpayers since it does not require giving the IRS extensive documents detailing financial situations.
Changes to the OIC Program
The OIC program is very sought after by taxpayers with a large tax debt balance. An Offer in Compromise is essentially an agreement between the IRS and taxpayer that settles the owed tax debt for a lesser amount. However, offers are not accepted if the IRS thinks that the taxpayer is capable of paying the balance in full. In 2012, the IRS allowed greater access to the OIC program by revising how it calculates taxpayer future income, allowing taxpayers to repay student loans and past-due state and local taxes, expanding the allowable living expense amount, and reducing the offer amount for those who qualify for an OIC. It’s important to note that the IRS does not accept OICs often. In fact, the IRS only accepted about a third of OIC applications from 2010-2019.
Tax Help for Those Who Owe
The Fresh Start program can really help taxpayers who owe the IRS but don’t necessarily have the funds to pay their debt. Working with an experienced tax relief company can help ease the process. If you are wondering if you are eligible for the Fresh Start program, we can help. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers.
Most people require assistance when it comes to preparing and filing a tax return. Some may even find themselves having to provide additional information to the IRS and do not know what it is or where to find it.
Hiring a tax professional could save individuals both time and money when dealing with the IRS. Tax professionals can also prepare tax returns, help file income taxes, and assist taxpayers when it comes to dealing with the IRS, tax notices, tax liabilities, audits, and more.
Types of Tax Professionals
There are various types of tax professionals who specialize in focused areas of tax relief or tax prep and carry specific professional licenses.
Certified public accountants or CPAs can provide a variety of services such as:
Maintaining financial records.
Examining financial statements.
Providing auditing services.
Preparing tax returns.
Some CPAs specialize in tax planning and preparation such as:
Tax audits.
Payment and collection issues.
Appeals.
Enrolled agents are trained to find federal tax matters and are licensed by the IRS. Enrolled agents can assist with the following:
The preparation of both individual and business tax returns.
The representation of clients.
Other aspects of being a tax professional.
A tax attorney is licensed by the state to practice law. Most states require an attorney to have a law degree and pass a test administered by the state (bar exam). Tax attorneys can assist taxpayer with:
The preparation of tax returns.
Tax planning.
Providing advice to clients on long-range strategies for reducing their taxes.
Like CPAs and EAs, tax attorneys have unlimited rights to represent a client before the IRS.
Areas of expertise
There are a range of services that tax professionals can provide to taxpayers that can help them understand their taxes better. Based on what service you need, choosing the right tax professional or tax preparer can help you get back on track with your taxes, small business, and much more.
Enrolled Agents are IRS-authorized tax professionals who work alongside the U.S. Department of the Treasury by providing representation to individuals who need tax assistance.
Certified Public Accountants (CPAs) have state certifications to practice accounting. These experts can help individuals navigate certain tax situations. CPAs are licensed to represent taxpayers before the IRS.
Retirement tax professionals can help individuals know how their retirement options will impact their taxes. These types of tax professionals have received advanced training in tax preparations specifically for retirement plan contributions, distributions, and rollovers.
Small Business/Sole Proprietor tax professionals specialize in working with small businesses’ tax returns and educate their clients on how to properly prepare both their personal and company returns. These types of tax professionals have specialized training in sole proprietors, partnerships, and S corporations.
Investment Income tax professionals specialize in big or small investments, and gains or losses. These tax professionals also show your current and future tax situations.
International Taxation tax professionals assist individuals who have lived or worked abroad. These tax professionals are trained in international taxation which includes, claiming foreign earned income exclusions, the foreign tax credit, or treaty benefits for nonresident aliens.
Professional Licenses
Enrolled Agents (EAs) and Certified Public Accountants (CPAs) are both experienced professionals who maintain high ethical standards. The main difference between an EA and CPA is that an EA specializes specifically in taxation. CPAs can provide a wider scope of tax services for individuals.
Working with an EA would be beneficial for those who have IRS issues such as individuals who are in collections or dealing with an audit with the IRS. An EA would be best suited for someone who needs assistance with the IRS to help them with their tax concerns. EAs are also a great option for those who need tax preparation assistance and planning advice for both individuals and businesses.
CPAs specialize in tax preparation that can help individuals identify both their credits and deductions that can help them qualify for an increase in their refund or help lower their tax bill. CPAs are also beneficial if someone needs their tax information compiled, reviewed, or audited.
When should I hire a Tax Professional?
You should hire a tax professional if you are short on time, are unsure how to file your taxes correctly, or feel overwhelmed by IRS forms with preparing your taxes. Tax professionals can help answer tax questions that you may have and even resolve most tax issues you may have.
The tax code can be very complicated and if you are unsure on how to handle your tax matters, a tax professional can assist. For example, a tax professional can help reduce the risk of any audit and know how to deal with the IRS on your behalf if you do end up being audited. Tax professionals can also help taxpayers avoid making costly mistakes on their tax return such as missed deductions or triggering an IRS letter. Tax professionals can also review previous tax returns to see if there were any errors and needs to be amended.
How to find the right Tax Professional for you
Individuals searching for tax assistance should follow these steps in order to find a tax professional who best fits their needs:
Confirm your preparer has a tax identification number (ITIN).
Make sure to confirm tax fees to ensure you are not being overcharged.
Avoid tax preparers who do not e-file tax returns.
Make sure that your tax preparer signs their name and provides their Preparer Tax Identification Number (PTIN) on your tax return.
Make sure your tax professional can respond to the IRS. Enrolled agents, CPAs and attorneys that have a PTIN can represent you when it comes to IRS audits, payments, and collection issues.
10 Questions to ask a Tax Professional
Do you have an IRS-issued Preparer Tax Identification Number (PTIN)?
How do you keep up with the latest tax law? Are you regularly taking education courses?
Do you offer a free initial consultation?
Will you be the one preparing my return or someone in your office?
Do you offer IRS e-file, and will my tax return be submitted to the IRS electronically?
Will you keep my records and receipts on file? How long will you keep my records for?
When do you require payment?
When can I expect to receive my completed tax return?
What happens if I get audited?
Do you outsource your tax preparation?
Things to look out for when hiring a Tax Professional
Taxpayers should be aware of any red flags they experience when looking to hire a tax relief professional. Here is what individuals should look out for before hiring a tax professional:
Check the preparer’s qualifications.
Review the preparer’s history.
Ask about services and fees.
Make sure that the preparer offers e-filing.
Ensure your preparer has open availability if you have additional questions regarding your taxes.
Never sign a return if your preparer has added their name or PTIN.
How much does it cost to hire a Tax Professional?
The average cost of hiring a tax professional will depend on the complexity of the case that they are working on.
Consequences of not Hiring a Tax Professional
The federal tax penalties you could face by not hiring a tax professional to help you prepare your taxes could far outweigh the cost of soliciting tax help. Here are the repercussions individuals could face if they choose to not hire a tax professional:
Filing your own taxes could be time-consuming and confusing if you have never filed before.
You can miss out on tax preparation fees that could have been deductible.
You could miss out on certain credits or deductions if you are not aware of them.
If you get audited, you will not have a tax professional that can assist you through the process.
Filing your own taxes could lead to you making avoidable mistakes that could cause you problems with the IRS down the road.
Tax Relief Services at Optima Tax Relief
Optima Tax Relief offers tax relief services to individuals who are struggling with their IRS or state tax debt. Taxpayers that need assistance with tax preparation, setting up a payment plan with the IRS, getting out of collections, resolving an audit, or are looking to see if they qualify for a possible reduction in their total tax debt, should consider using Optima’s services.
Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.
For taxpayers who have been working with the IRS, it is important for them to know that they have a right to finality. Specifically those who have had their tax return(s) audited by the IRS should know that there is a Taxpayer Bill of Rights in place to protect them.
For taxpayers currently in the audit process, here is what you need to know about your right to finality:
Taxpayers have the right to know
The maximum amount of time they have to challenge the IRS’s position.
The maximum amount of time the IRS has to audit a tax year or collect a tax debt.
When the IRS has finished an audit.
The IRS typically has three years from the date that a taxpayer files their return to review for an additional tax for the year in question.
There are very few exceptions when it comes to the three-year rule. An exception would be considered if a taxpayer fails to file a return or files a fraudulent return. In either case, the IRS would have an unlimited amount of time to assess tax for the tax years in question.
The IRS generally has 10 years from the date of assessment to collect unpaid taxes. It is important for a taxpayer to know that the 10-year period cannot be extended unless a taxpayer enters into a payment plan or the IRS obtains court judgments.
A 10-year collection period may be suspended when the IRS cannot collect money because a taxpayer has an ongoing bankruptcy or there’s a collection due process proceeding involving the taxpayer.
A taxpayer will only be subject to one audit per tax year. The IRS has the ability to reopen an audit for a previous tax year if the IRS deems it necessary.
If you need tax help, contact us for a free consultation.
