Articles Tagged with Tax Debt

Each one of these things can have serious consequences depending on the plan we develop for dealing with your debt, so:

1. Don’t borrow any more money. Don’t take out a second mortgage.
2. Don’t take money out of your retirement, 401k, or IRA.
3. Stop using your credit cards. Don’t use the convenience checks and don’t take cash advances. Don’t do “balance transfers” from one credit card to another.
4. Don’t keep your money in the same bank or credit union where you owe money. Stop all direct deposits into that account and redirect them to a different bank. Continue reading

paying uncle samIn a Chapter 7 and Chapter 13, as long as four basic criteria are met, both state and federal income taxes can be discharged.

  1. The tax return due date was at least 3 years before filing bankruptcy.
  2. The filing of the tax return must have been done at least 2 years before the bankruptcy filing.
  3. At least 240 days before filing bankruptcy, the taxes must have been assessed.
  4. The tax return is not fraudulent and the taxpayer is not guilty of tax evasion.

For example – 2009 taxes were not due until April 2010, so based on the first criteria above, they could not be discharged until 2013 when they will then be 3 years old.

Sales taxes, taxes withheld from employee salaries, taxes that have priority status, and income taxes that do not meet the criteria above cannot be discharged (wiped out) in a bankruptcy.  However – they can be paid out over the period of a Chapter 13 plan (3-5 yrs).  This is often a lower payment amount than what the IRS would make arrangements for and the bankruptcy stops the penalties and interest that would  otherwise continue to accrue.  As well, if the debt is large and payment in full would not be possible within a single Chapter 13 plan (max of 5 yrs), it is possible to file back to back Chapter 13 cases that would extend the protection of the court and payment plans longer than 5 years.

If you are a self-employed worker you will receive a 1099 for your wages instead of a W-2 form. But there is another type of 1099 that you may receive from one of your creditors. This is form 1099C.  A 1099C form is used when all or a portion of a debt is canceled or forgiven by the creditor. If the amount exceeds $600.00 a creditor must report this debt forgiveness to the IRS. The IRS counts the forgiven or cancelled debt as income that must be reported on your tax return.

You should receive a copy of the 1099C form in the mail from your creditor(s) when they file the form with the IRS.  You may not have gotten a copy. If not, the IRS will send you a notice stating you failed to include income on your tax return as a result of a creditor filing the 1099C form. Now you owe taxes, penalties and interest on the amount.

But wait, there are reasons why you may not have to pay taxes on this canceled debt. Here are some of the exceptions listed in IRS Publication 4681 that would relive you of the taxes, penalties and interest.