Bankruptcy-Related Tax Issues

Seattle Attorney for Bankruptcy Petitions and Unpaid Taxes

When a taxpayer is facing the threat of enforced IRS collection proceedings, another alternative is to file a bankruptcy petition. As a general rule, all tax claims except priority taxes are dischargeable, depending on the circumstances of each case.

Based in Bellevue and serving Washington State and Seattle, attorney Olga Guzhva has helped many clients determine if bankruptcy is a good option for them. To consult with us about our tax attorney services and whether they are right for you, we welcome you to contact Guzhva Law Firm to schedule a free phone evaluation.

Bankruptcy as Your Debt Reduction Technique

Taxes are frequently one of the major debts of individuals and businesses. For a taxpayer whose total liabilities substantially exceed the taxpayer’s assets and whose tax liability is presently dischargeable, a bankruptcy petition may present a valuable option.

The filing of a bankruptcy petition can result in the elimination or reduction of large amounts of tax debt, since the ultimate goal of all bankruptcies is a “fresh start” for the taxpayer. Bankruptcy is also an effective technique to deal with an uncooperative Revenue Officer, and it can substitute for an Offer in Compromise.

To understand how bankruptcy works, you should be familiar with its key terms and concepts.

Timing of Your Bankruptcy Petition Filing

Correct timing of your bankruptcy petition filing will give you an opportunity to decide on a strategy in dealing with your financial situation. Obtaining a bankruptcy discharge is often a waiting game, involving stringent compliance with multiple timing rules.

Automatic Stay of Tax Collection During Bankruptcy Proceedings

The Bankruptcy Court and the Tax Court have concurrent jurisdiction to determine the debtor’s tax liability, but the Bankruptcy Court usually decides which court will hear the case.

  • If a Tax Court petition is filed before the bankruptcy petition, the bankruptcy petition will stay the proceedings in the Tax Court.
  • No actual collection may occur during the pendency of the bankruptcy case without permission from the Bankruptcy Court. In other words, when a debtor files a bankruptcy petition, creditors (including the federal government) are automatically stayed (prevented from engaging in any further collection action). For example, the tax lien does not attach unless the Bankruptcy Court has determined:
    • that the tax liability is a nondischargeable debt, and
    • the property to which the lien would attach has been transferred out of the bankruptcy estate to the debtor.
  • If the taxes are not dischargeable, the IRS can seek to collect the amounts as part of the bankruptcy proceeding or wait until the automatic stay is lifted and then collect the amounts directly from the taxpayer.

NOTE: Any tax return due date (including any extensions) arising before the bankruptcy petition filing date, is nondischargeable under “the three-year rule.”

We Can Help You

At Guzhva Law Firm, we are providing thoughtful solutions and measurable value to each individual situation. Because U.S. tax law and regulations are complicated and constantly changing, it is important that you obtain up to date information about the provisions that apply to you to prevent costly mistakes.

Because the IRS enforced collection procedures can seriously disrupt the taxpayer’s business and employment relationships and jeopardize the taxpayer’s credit rating, it is important for the taxpayer to consider this alternative carefully before deciding it is best.

Like bankruptcy, other alternative methods of tax repayment also apply to taxpayer who is experiencing financial hardships that make it difficult to pay their taxes. In deciding which approach to take, much will depend on the individual facts of the particular case, with certain comparisons that can be made by our tax attorney.

To schedule a consultation with a tax attorney, please contact us today. With offices in Bellevue, we work with tax clients throughout Seattle and Washington State, and elsewhere.

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