Money Watch Q & A: Tax Debt
The dreaded Tax Day is behind us, but the burden of paying Uncle Sam lingers for many northern Nevadans. In tonight's Money Watch Q & A, we will discuss the best options for managing tax debt and how to repair your credit. Tricia Darby is an attorney and partner with Darby Law Practice. She will be available to answer your questions between 5 – 6 p.m. at (775) 858-2222.
Here is more helpful information from www.darbylawpractice.com.
Tax Debt Dischargeable in Bankruptcy:
Most tax debt is not dischargeable in bankruptcy. Federal income tax debt is dischargeable, but only if it meets certain conditions. For instance, the debt must relate to a tax return with a filing deadline that is more than three years old, including extensions. Also, the tax return that the debt relates to must have been filed at least two years ago, and the tax assessment itself must be at least 240 days old. Finally, the debt is not dischargeable if the tax return is fraudulent or if the taxpayer is guilty of tax evasion.
Even if the tax debt is not dischargeable, bankruptcy in Reno can still be of great help:
First of all, the automatic stay puts an immediate stop to all collection efforts as soon as the bankruptcy is filed. Then, if filing a Chapter 11 or Chapter 13, you can arrange to pay off the debt in a payment plan over three or five years without incurring any further interest or tax penalties.
Non-Bankruptcy Options for Dealing with Tax Debt:
You also have options outside of bankruptcy for dealing with the tax debt, including working directly with the IRS. You may be able to set up a payment plan, or negotiate an offer in compromise, whereby the government agrees to accept a lesser amount in satisfaction of the debt. An offer in compromise is often available where a legitimate dispute exists about the tax liability, if it is unlikely that you will be able to pay the debt, or if colleting the full amount would be unfair or cause a hardship. Regarding payment plans, the IRS is usually quite reasonable in setting up a payment plan and is patient so long as you stick to the plan and stay in contact with them.
Tax Consequences of Discharged Debt versus Settled Debt:
In general, if you are liable for a debt that is canceled or forgiven, you must include the canceled amount in your gross income on your federal income taxes. For instance, if you negotiate a debt settlement for less than the amount you actually owe, or if you go through a foreclosure or short sale and the lender cancels your liability for the deficiency, you are required to report that canceled amount that you did not have to pay as income to the IRS. In contrast, any debt discharged in bankruptcy is not treated as income. Bankruptcy, therefore, allows you to cancel out a greater portion of a debt without any tax consequences compared to a non-bankruptcy option.
Written by Kristen Remington