Tax Aspects of Bankruptcy

Understanding the tax aspects of bankruptcy discharges

Only taxes on income that was declared in a return filed with the IRS can be discharged. Additionally, the code provides for a period of years for the IRS to collect taxes owed before an assessment may be discharged. Nevertheless, older taxes that remain unpaid can be discharged in limited circumstances. The tax aspects of bankruptcy quickly become confusing to even the most talented attorneys. This confusion is due primarily because of the expansive view of court decisions interpreting the rights and privileges of the IRS. In recent years, when clarifying conflicts of law, courts tend to limit individual taxpayer rights and actively favor the government's right to collect legitimately assessed taxes.

How to stop tax seizures

Consumers are armed with a powerful right of avoidance when faced with levies and seizures. Rather than discharging debts in Chapter 7, anyone who is qualified for Chapter 13 may propose a plan which includes past due taxes. In this event, taxes are presumed current, and the IRS receives priority status for repayment through the plan, and cannot execute levy or seizure orders so long as plan payments remain current. In effect, this priority requires that the IRS is paid first from funds distributed by the plan. For debtors, this priority is a benefit as well, because the most threatening debt is eliminated first, leaving general unsecured claims for last payment. Debtors may convert to Chapter 7, if qualified, and discharge general unsecured debts after priority debts are repaid.