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Chapter 13 Bankruptcy and Taxes

chapter 13 bankruptcy and taxes

We are told that filing for bankruptcy should be the very last resort when dealing with extreme financial hardship. This is because it has long-term effects. For example, it will leave a negative impact on your credit score for up to 10 years. It will result in decreased access to credit, loss of assets, and sometimes forfeiture of tax refunds. In addition, bankruptcies are public information, so employers, customers, family, and just about anyone can access this information. Filing for bankruptcy must be a calculated decision and one that takes all factors into consideration, including the tax implications. In this blog article, we’ll look at the tax consequences of Chapter 13 bankruptcy and provide useful information to help individuals and companies make informed decisions. 

What is Chapter 13 bankruptcy? 

Chapter 13 bankruptcy is often known as the wage earner’s bankruptcy, including self-employed individuals and sole proprietors. This is because it is for those who have income but have fallen behind on payments for items purchased on credit. In Chapter 13 bankruptcy, your debts are reorganized, and a payment plan is established. A court-appointed trustee will supervise you and collect and distribute your payments. As long as you satisfy the terms of the repayment plan issued by the bankruptcy court, you should be allowed to keep your house after Chapter 13 bankruptcy. Under Chapter 13, you have 3-5 years to pay off your obligations while devoting all of your disposable income to debt repayment. That implies simple living. However, the Chapter 13 option allows you to erase unsecured debt, such as credit card bills, while catching up on home payments. 

What happens to tax debt after filing for Chapter 11 bankruptcy? 

Tax debts cannot usually be discharged (wiped away) in Chapter 13 bankruptcy. You instead repay your tax debts over the course of your Chapter 13 repayment plan. This could take three or five years. Typically, during bankruptcy, debts will be classified as priority or nonpriority. These tax debts need to be paid in full during the repayment period. This can include income taxes, FICA, some employment taxes, penalties, and others. On the other hand, nonpriority debts are usually combined with unsecured debts you have, such as credit card debt. These are the debts that are likely to be settled with creditors for less than what you owe. However, if you still have remaining taxes due when your repayment period ends, you must pay them in full. Any outstanding tax debts will not be discharged, and you will be obligated to pay them. 

Filing Tax Returns After Bankruptcy 

Like the other two chapters, it is imperative that you still pay your taxes while in Chapter 13. It is critical to keep up with your tax duties during your bankruptcy process, including timely filing of tax returns and payment of any taxes owed by the due date. While in bankruptcy, you can technically still receive tax refunds. However, they might be delayed or utilized to pay off tax debts. 

Tax Help for Bankruptcy Filers 

It can be difficult to pay taxes while in Chapter 13 bankruptcy. You may confront a variety of difficulties. Some examples are managing all payments, paying down interest and penalties on your tax debt, changing your repayment plan to incorporate tax liabilities if it hasn’t been done already. Taking care of both tax payments and overdue tax bills during Chapter 13 can be overwhelming, but it really is crucial to not only understand your tax obligations but also figure out how to manage your debt during your repayment plan. Rest assured, working with experienced bankruptcy lawyers and tax professionals can help mitigate the situation and help you successfully navigate the bankruptcy process. If you need tax help, Optima Tax Relief is here.  

Contact Us Today for a Free Consultation 

Chapter 11 Bankruptcy and Taxes

chapter 11 bankruptcy and taxes

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.  

If You Need Tax Help, Contact Us Today for a Free Consultation

Chapter 7 Bankruptcy and Taxes

chapter 7 bankruptcy and taxes

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.  

Contact Us Today for a Free Consultation 

How IRS Installment Agreements Work

how irs installment agreements work

When most people first examine tax relief options, they might have their hopes set on an offer in compromise – or their tax debt settled for less than what they owe. Unfortunately, OICs are more often denied by the IRS than they are accepted. When tax debt becomes too much to manage, an IRS installment agreement might be your best option. Here’s an overview of how IRS installment agreements work. 

What Is an IRS Installment Agreement? 

An installment agreement is basically an IRS payment plan to pay your tax bill over a set period of time. The installment agreement will bundle all taxes owed if you owe tax for more than a year. That said, you cannot have two installment agreements with the IRS. During this time, the IRS will generally stop levying. Collections are typically ceased or prolonged while the installment agreement is pending until it can be approved or rejected. However, the IRS will typically keep any tax refunds you receive and apply them to your tax bill. If the installment agreement request is rejected, collections will be suspended for 30 days. Every taxpayer has the right to appeal a rejection. In this case, collections will be suspended until a decision is made on the appeal.  

What IRS Installment Agreements Are Available? 

The IRS offers both short-term and long-term installment agreements. Let’s review the eligibility criteria, terms, and costs for both. 

Short-Term Installment Agreement 

With a short-term installment agreement, you will need to pay your full tax bill within 180 days or less. This option is available to taxpayers who owe less than $100,000 in combined tax, penalties and interest. To qualify, you must be current on all tax returns. Individual taxpayers, including sole proprietors and independent contractors, can apply online, over the phone, via mail or in person for free. It’s important to note that interest will continue to accrue while you’re making payments. The current interest rate is 8% per year, compounded daily. Some penalties will also still apply. 

In general, the IRS will ask how much you can afford to pay each month. Once a monthly payment is finalized, payments can be made through automatic bank account withdrawals, also known as a Direct Debit installment agreement. You can also make non-automated payments online or by phone, or via check, money order, or a debit or credit card. Payments made with debit or credit cards will also be charged with a processing fee. Debit card processing fees are about $2-4 per payment while credit card processing fees can be up to 2% of the payment. You can review your installment agreement details through your online IRS account. You can also make some changes to your agreement online including your monthly payment, monthly due date, bank information, and more.  

Long-Term Installment Agreement 

Individuals

With a long-term installment agreement, you can pay your full tax bill in over 180 days. This option is available to taxpayers who owe less than $50,000 in combined tax, penalties and interest. To qualify, you must be current on all tax returns. Individual taxpayers, including sole proprietors and independent contractors, can apply online, over the phone, via mail or in person for free. It’s important to note that interest will continue to accrue while you’re making payments. The current interest rate is 8% per year, compounded daily. Some penalties will also still apply. 

The fees for a long-term installment agreement are more substantial. If you want to pay monthly through automatic withdrawals, there is a $31 online setup fee, or a $107 setup fee to apply by phone, mail or in person. Low-income taxpayers might be able to get this fee waived. If you want to make monthly non-automated payments, you will need to pay a $130 online set up ($43 for low-income taxpayers), or $225 to apply by phone, mail or in person. There is also a $10 fee to revise an existing installment plan or to reinstate after defaulting. This fee may be reimbursed for low-income taxpayers.  

Businesses

Businesses are also eligible for long-term installment agreements if they are current on all tax returns and owe $25,000 or less in combined tax, interest and penalties. The same setup fees apply to businesses. 

For debt less than $50,000, you will typically have a maximum of 72 months to pay off your tax bill. Your minimum payment can be found by taking your tax balance and dividing it by 72 months. If you find that you won’t be able to pay this calculated amount each month, you’ll need to complete Form 433-F, Collection Information Statement, which obtains your current financial information to determine how to pay your tax bill. 

For debt greater than $50,000, you will usually need to submit Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, which obtains your current financial information to determine how to pay your tax bill. The IRS will also examine any meaningful assets you have that can be sold to pay down your balance and then set up an installment agreement. 

Tax Help for Those Seeking an Installment Agreement 

If you know you won’t qualify for tax debt settlement, an IRS installment agreement may be your best option to help manage your tax debt. An IRS installment agreement can truly be helpful to many taxpayers struggling with their tax debt. The most important thing to remember is to always make your installment agreement payment. If you default on your agreement, it may be terminated, and the IRS may begin enforcement actions. Be sure the installment agreement terms are viable for your own financial situation. Optima Tax Relief has over a decade of experience helping taxpayers get back on track with their tax debt.

If You Need Tax Help, Contact Us Today for a Free Consultation 

How to Get Rid of Back Taxes

how to get rid of back taxes

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.  

If You Need Tax Help, Contact Us Today for a Free Consultation 

What is the IRS Fresh Start Program?

what is the irs fresh start program

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.  

If You Need Tax Help, Contact Us Today for a Free Consultation