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Taxes and Bankruptcy: What You Need to Know

Taxes and Bankruptcy: What You Need to Know

There are so many intricacies in bankruptcy law that it can be very overwhelming, especially considering that getting to the point of having to file for bankruptcy is overwhelming in itself.  Often what affects what and how can get lost in the shuffle.  It is much easier to go forward with something, and less overwhelming if you know all of the details beforehand.  Liken it to a doctor explaining each step of the process as he does it so the patient always knows what is coming.  It may still not be pleasant, but it is at the very least not a surprise.  Consider your bankruptcy attorney your bankruptcy doctor.

Back Tax Returns

Filing for bankruptcy will affect your tax situation, but likely not in the way you expect. First thing first, before you can even file a bankruptcy claim all back taxes must be completed and filed.  If you happen to not realize this and file a claim while you still have unfiled tax returns from previous years, the clock starts ticking. You have a limited amount of time at that point to get those returns filed before the claim is thrown out.  This is where a CPA comes in very handy, as they can file the forms in the most effective, efficient manner possible.

Tax Debt

Tax debt is exempt from discharge.  This means that even when a bankruptcy claim is approved, the tax debt will still be owed including any penalties and late fees. There is a possibility that collection efforts could be paused for a bit, but they will eventually start up again and fees and interest continue to accrue even when collection efforts are not being made.  Basically, bankruptcy is not a way out of paying the IRS. Other debt may be discharged, but tax debt will not be.  In fact, the tax debt can even grow during this time if payments are not made during the proceedings.  A bankruptcy lawyer can help you come up with a plan of attack for this debt growth so that it does not get any more out of hand than necessary.

The Best Advice

If you see bankruptcy in your future, visit a Las Vegas bankruptcy lawyer and keep your taxes up to date. Go ahead and get back taxes filed or at least get them started so that does not hold up the process. Also, even if other debts have to be ignored, keep paying your tax debt as much as possible.  Those other debts may fall under discharge, so use what you can to pay the IRS and avoid as much in penalties and interest as possible.

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