Five Bankruptcy and Tax Myths

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Find out what you didn't know about bankruptcy and your taxes. Get the truth about five common myths regarding your tax debt and bankruptcy proceedings.

Five Myths about Bankruptcy and Taxes

If you're having financial difficulties, there are many things to consider about tax debt and bankruptcy. These common misperceptions about bankruptcy and taxes can cause a taxpayer to implement a bad debt relief strategy. Here are the answers to four common misperceptions when dealing with your tax debt during a bankruptcy.

1. Tax debt can be jettisoned in a bankruptcy.

This is just not true.

The IRS loves bankruptcy attorneys because they are not familiar with the intricacies of the IRS. Bankruptcy attorneys may promise your tax debt will be discharged, and may even try to include it in your bankruptcy. But unless they know the facts about tax debt, you, not your bankruptcy attorney, will still owe the IRS, the most powerful collection agency in the world.

2. Any years owed can be included in a bankruptcy filing.

Wrong.

You can not include any years filed fewer than three years ago. For example, if you're filing bankruptcy in 2007, then the last tax year you have debt from that you can include would be 2004. The taxes had to have been filed on time that year. If the IRS filed the return for you then it cannot be included.

3. Interest and penalties stop accruing during bankruptcy proceedings.

The nose of the person who told you this is growing bigger and bigger.

Interest and penalties continue to accrue during bankruptcy proceedings. If your bankruptcy ends up being dismissed, you will still owe the original tax debt plus interest and penalties.

4. The time that it takes you to get through bankruptcy proceedings is factored into the statute of limitations on your IRS tax debt.

Not true again.

The statute of limitations is the amount of time the IRS has to collect your debt. The time that it takes to steer through your bankruptcy proceedings extends the statute of limitations on your IRS tax debt. It's normally 10 years, but a bankruptcy increases that time limit, giving the IRS more time to get your money.

5. IRS tax liens are cleared from your credit once your debt is settled.

Not yet.

An IRS tax lien stays on your credit for 10 years from the time it was placed, regardless of whether your debt was settled. Even if the IRS doesn't get its money, it gets your credit.

Recruit a Tax Professional

Get help from a tax professional if you have any doubt about tax debt and bankruptcy. Besides, if your financial situation is so grave that you're filing bankruptcy, you may qualify for a lower debt settlement.