Does Bankruptcy Mess with Your Taxes

feeling desperate due debts, unpaid bills, lack of money to pay monthly loan or bank mortgage

When financial crises loom, bankruptcy often emerges as a crucial relief strategy. At Ursulova Law Offices, P.C., based in Brooklyn and Garden City, New York, we frequently encounter questions about the intersection of bankruptcy and tax obligations. It’s vital to grasp this interaction to plan effectively for financial recovery.

Tax Liabilities in Bankruptcy

Bankruptcy doesn’t automatically clear all types of debt, especially tax-related liabilities. For instance, recent income taxes—typically those owed within the last three years—remain payable. However, income taxes that are older can potentially be discharged if they meet specific criteria:

  • The due date for the tax return was at least three years ago.
  • The tax return was filed no less than two years prior.
  • The tax assessment is over 240 days old.
  • There was no fraud or evasion involved in the filing.

These conditions suggest a strategic approach to handling tax debts during bankruptcy, which our team is well-equipped to assist with.

Ongoing Tax Obligations During Bankruptcy

Maintaining up-to-date tax filings is essential during bankruptcy. In cases like Chapter 13, proof of filed tax returns for the four years preceding the bankruptcy filing is necessary. This requirement ensures transparency and adherence to legal obligations throughout the bankruptcy process.

Automatic Stay and Its Limits

Filing for bankruptcy triggers an automatic stay, effectively pausing most creditors’ actions against you. However, this pause does not extend to all activities by the IRS. Despite the automatic stay, the IRS retains the authority to conduct audits, issue notices of tax deficiencies, and assess new taxes. Understanding the limits of the automatic stay is crucial for anyone dealing with bankruptcy.

At our law offices, we emphasize the importance of being aware of these continuing obligations with the IRS. Our Brooklyn bankruptcy attorney provides guidance to ensure that our clients fully understand these boundaries and are prepared to address any IRS actions during their bankruptcy process. We help clarify what the automatic stay covers and what it doesn’t, preventing any surprises and aiding in a smoother bankruptcy journey.

Post-Bankruptcy Tax Concerns

After completing a bankruptcy process, managing your tax responsibilities is crucial to avoid unexpected financial issues. Here are essential points to keep in mind:

  • Handling Discharged Debts

Generally, forgiven debts are taxed as income. Nevertheless, debts forgiven due to bankruptcy are not taxed, a significant relief for those already struggling. This exception prevents additional tax burdens during a time of financial reset.

  • Bankruptcy Estate Taxes

In Chapter 7 cases, a separate bankruptcy estate is formed, requiring its tax filings. The complexity of these filings depends on the estate’s asset composition and activity, managed by the appointed trustee. Our lawyers in Brooklyn help clients understand these requirements and ensure compliance with tax laws post-bankruptcy.

  • Continued Tax Payments

Certain taxes, like recent property taxes or new income taxes, must still be paid after bankruptcy. Chapter 13 plans often include arrangements to settle these taxes over time, providing a structured path to clearing these ongoing tax liabilities.

How Our Firm Supports You Through Bankruptcy and Tax Challenges

Facing bankruptcy and its impact on your taxes can be daunting, and having the right legal support is essential. Ursulova Law Offices, P.C. offers effective legal solutions and meticulous attention to billing and arbitration, making us your ideal partner through financial challenges. Our proficiency in bankruptcy and no-fault arbitration matters equips us to provide clear and practical guidance. Discover more about our approach on our About Us page.

If you are at a pivotal financial point in Brooklyn or Garden City, please reach out. Our team includes committed attorneys in Brooklyn for personal injury-related bankruptcy issues, and for bankruptcy concerns in Brighton Beach. Contact us today at Ursulova Law Offices, P.C., and take the first step towards securing your financial recovery.

Ursulova Law offices, P.C.

Contact Ursulova Law Offices, P.C. to find out how our NY Bankruptcy Attorneys can help you today. Our offices are located in New York, Brighton Beach, Brooklyn and Garden City.


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