How to Determine if Bankruptcy is a Viable Tax Relief Option for Resolving IRS Back Taxes

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How to Determine if Bankruptcy is a Viable Tax Relief Option for Resolving IRS Back Taxes

Most taxpayers don’t realize that IRS tax debt may be eligible for discharge in bankruptcy. Record numbers of people filed bankruptcy last year because they lost their jobs or they lost their pension or maybe had a catastrophic life event that then caused their financial world to fall off a cliff.

Sometimes tax relief bankruptcy is the most appropriate course of action when you have a big IRS tax problem. And other times it’s not- and something like the Offer in Compromise program may be a much better option than tax relief bankruptcy.

Bankruptcy is an option used by the world’s biggest businesses as well as the humblest individuals. Obtaining tax relief through bankruptcy can give people a fresh start. Some people may think bankruptcy is a way to sneak around the system, but the purpose is actually to level the playing field so that people can permanently resolve their tax problems once and for all.

Bankruptcy does not always remove all tax liabilities. Not all IRS taxes, penalties, and interest qualify for complete 100% discharge. In order for a taxpayer to benefit from bankruptcy laws, it is important to get expert tax help from an  IRS tax attorney or Certified Tax Resolution Specialist to determine whether or not your tax liabilities are eligible for discharge.

If you qualify for discharging your tax liabilities through bankruptcy, you can get massive tax relief from the government. However, only a seasoned tax attorney, CPA or Certified Tax Resolution Specialist can provide tax help to show you the proper sequence of events to declare bankruptcy and completely eliminate all of your back taxes, if you are eligible.

In October 2005, Congress enacted the Consumer Bankruptcy Law – including big changes that affect the ability to discharge income taxes. Therefore, it is highly recommended that the taxpayer seek out experienced legal counsel from a tax attorney or Certified Tax Resolution Specialist who specializes in tax relief bankruptcy.

Before you get started down the path of tax relief bankruptcy, here are a few tips.

Tax Relief Bankruptcy Tip #1: Does your debt consist of taxes, or everything but taxes?

Sometimes tax relief bankruptcy is the most appropriate course of action when you have a big tax problem. And sometimes it’s not. The first test to see if bankruptcy will give you maximum tax relief is to start with the question “What is your biggest problem? Is it everything BUT taxes, or is it the taxes?” If you have lots of creditors that you are having trouble paying, bankruptcy may be your best option. If your only major creditor is Uncle Sam, a tax attorney or Certified Tax Resolution Specialist can help you consider additional back tax relief options like an IRS installment agreement that may be a better fit depending on your exact circumstances and the tax relief solutions you qualify for.

Tax Relief Bankruptcy Tip #2: Get the maximum tax debt forgiveness with the right kind of bankruptcy.

There are three types of bankruptcies:

Chapter 7: Chapter 7 is what everyone wants. Chapter 7 is total tax debt forgiveness, wiping out everything. The bankruptcy laws changed a few years back. These days you have to get your tax attorney or Certified Tax Resolution Specialist to petition a judge to grant Chapter 7. There’s now a financial means test that mirrors very closely the IRS test for the Offer in Compromise program. A financial means test means that you have to prove you can’t pay. Your assets are significantly less than what you owe. You don’t have to be destitute, but if the tax debt is so massive compared to your assets that you’re upside down or insolvent, then that’s obviously a key test to be a Chapter 7 candidate. Chapter 7 is complete forgiveness. It wipes off the plate. And that’s called discharge. You want the discharge to get total tax debt forgiveness. If Chapter 7 is not possible – and bankruptcy tax attorneys have to be a lot more rigorous around this than they had been in the past – the bankruptcy tax attorney is supposed to then submit a petition for a Chapter 13
Chapter 11: Chapter 11 is primarily used by businesses as a form of a business reorganization that allows you to negotiate with your creditors to restructure debts so that your business can emerge from bankruptcy with a sustainable debt load. If you are self-employed and/or incorporated, consult with a tax attorney or Certified Tax Resolution Specialist about how you can use Chapter 11 tax relief and debt relief to make your business stronger.
Chapter 13: A Chapter 13 is basically a structured payment plan. It’s called a Wage Earner Plan. It is very similar to the Offer in Compromise program, but gives you a big hit on your credit report for the next 10 years.

Tax Relief Bankruptcy Tip #3: Know when bankruptcy is a better option than an Offer in Compromise.

The IRS’s Offer in Compromise program is a fresh start program, and sometimes it’s a much better option than bankruptcy. In many instances the tax obligation can be reduced, without the burden of a bankruptcy on your credit report for the next 10 years. So it’s important to consult with a tax attorney or Certified Tax Resolution Specialist to discern the benefits of different tax debt solutions for your case.

Tax Relief Bankruptcy Tip #4: Business bankruptcy is different from personal bankruptcy.

Many self-employed people have incorporated as a business. Incorporation provides you with personal protection from tax debt. Depending on the laws in your state, you can simply declare bankruptcy and dissolve your corporation with no impact on your personal credit history. Ideally under this scenario your corporation’s tax debt vanishes in a poof of smoke with no personal liability but in reality you’ll need to consult with a tax attorney or Certified Tax Resolution Specialist to work out the details in your case.

Bankruptcy is sometimes the best option, but it will haunt your credit report for the next 10 years. When there aren’t any other significant debts, an IRS tax attorney or Certified Tax Resolution Specialist can help you significantly reduce your tax obligation through less drastic means. But if you go down the bankruptcy path, take heart. In many cases, people can reestablish their credit history in as little as two years.

Michael Rozbruch is one of the nation’s leading tax experts. A Certified Tax Resolution Specialist (CTRS), licensed CPA and the founder of Tax Resolution Services. He helps individuals and small businesses solve their IRS problems and is dedicated to educating the public on tax planning and other strategies for managing their personal and business finances.For more information on how to resolve your back taxes and remove IRS bank levies, visit www.taxresolution.comfor a free tax relief consultation or call 866-IRS-PROBLEMS.
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