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Tax Consequences of Bankruptcy
With few exceptions, taxes owed to the local, state, or federal government cannot be discharged in bankruptcy. Additionally, filing bankruptcy creates an obligation for a debtor to file certain tax returns or risk having his or her case dismissed.
Back taxes are one of many reasons that people seek bankruptcy relief in the first place. Anybody who has or anticipates a significant tax burden should be certain to retain legal counsel when exploring their bankruptcy options.
Attorney in Cincinnati, OH Discusses Tax Consequences of Bankruptcy
Do you have questions about how your taxes will impact your Chapter 7 or Chapter 13 bankruptcy filing? Steiden Law Offices can help you understand all of your financial options.
Our Cincinnati bankruptcy lawyers represent clients in Hamilton County in Ohio and communities throughout Kenton County and Boone County in Kentucky. You can have our attorneys provide an honest and thorough evaluation of your case when you call to schedule a free initial consultation.
Overview of Tax Consequences of Bankruptcy in Northern Kentucky
- How is tax debt prioritized when you file for bankruptcy?
- What do I do if I receive an IRS Form 1099-C?
- Where can I find more information about tax consequences of bankruptcy in Cincinnati?
Title 11 U.S. Code § 507 establishes the priority order for expenses and claims in bankruptcy cases. Priority refers to the right of a creditor to be repaid before other creditors. Administrative expenses—which can consist of taxes that have accrued during the bankruptcy—have second priority, behind only domestic support obligations.
The eighth category on the list is commonly referred to as "eighth priority" tax claims and includes:
- a tax on or measured by income or gross receipts for a taxable year ending on or before the date of filing the petition, in accordance with 11 U.S.C. § 507.;
- a property tax incurred before the start of the case and last payable without penalty after one year before the date of the filing of the petition;
- a tax required to be collected or withheld and for which the debtor is liable in whatever capacity;
- an employment tax on a wage, salary, or commission of a kind specified in 11 U.S. Code § 507 (4) earned from the debtor before the date of the filing of the petition, whether or not actually paid before such date, for which a return is last due, under applicable law or under any extension, after three years before the date of the filing of the petition;
- atax on certain goods incurred due to a transaction that occurred before the date of the filing of the petition due in accordance with the Statute;
- a customs duty arising out of the importation of merchandise under the circumstances outlined in the Statute; or
- a penalty related to a claim of a kind specified in this paragraph and compensation for actual pecuniary loss.
Taxes become priority unsecured debts when they have been assessed by the government within 240 days of bankruptcy filing, a debtor does not file a tax return that was due within three years before filing for bankruptcy, or the debtor does not file a tax return for the year following the bankruptcy filing.
Discharging debts through bankruptcy usually carries no consequences for a debtor. Despite that fact, many debtors will receive IRS Form 1099-C statements from creditors even after discharges have been granted.
When a creditor writes off debts after a set period of time and the debt being written off exceeds $600, the creditor must file a Form 1099-C with both the debtor and the Internal Revenue Service (IRS). In such cases, a debtor can simply file a Form 982 with the IRS to notify the agency that the debt in question was included in his or her bankruptcy discharge.
Cancellation of debt (COD) income can become a major tax issue for debtors who have agreed to receive debt forgiveness or who have settled debts before filing bankruptcy. For example, if a debtor owing a creditor $10,000 agreed to settle the debt with a lump sum payment of $5,000, the IRS will count that $5,000 being forgiven as COD income and impose taxes on such an amount. It is critical to speak to an attorney to avoid issues like these arising later on.
Publication 908 | Internal Revenue Service — Visit this section of the IRS website to learn more about Bankruptcy Code tax compliance requirements. Find information about tax returns due after the bankruptcy filing and disclosure of debtor's return information to trustee. You can also learn more about prompt determination requests, court jurisdiction over tax matters, and discharge of unpaid taxes.
2016 Publication 4681 | Internal Revenue Service — IRS Publication 4681 deals with canceled debts, foreclosures, repossessions, and abandonments. Page 5 details how to report a bankruptcy exclusion. Information about reduction of tax attributes concerning bankruptcy and insolvency can be found on page 10.
Steiden Law Offices | Cincinnati Bankruptcy Lawyer
If you have concerns about how your taxes could affect your Chapter 7 or Chapter 13 bankruptcy filing in Ohio or Kentucky, it will be in your best interest to seek legal representation. Steiden Law Offices has Ohio locations in West Chester, Cincinnati, and Maineville as well as offices in Covington and Florence in Kentucky.
Our Cincinnati bankruptcy attorneys can perform a complete analysis of your tax situation and help you get a fresh start. Call or complete an online contact form to have our lawyers review your case and answer all of your legal questions during a free, confidential consultation