Bankruptcy and Income Taxes
When a person files for bankruptcy, their income and assets are subject to a number of restrictions. One such restriction is that the individual is not allowed to incur any additional debt. This includes income taxes that are owed to the government.
Income taxes that are owed to the government are considered a priority debt. This means that the government has a higher claim on the individual's income and assets than other creditors. As a result, the individual is responsible for paying the income taxes even if they are filing for bankruptcy.
There are a few ways that the individual can go about paying income taxes. The first option is to pay the taxes in full. The second option is to enter into an agreement with the government to pay the taxes over a period of time. The third option is to have the taxes discharged as part of the bankruptcy proceedings.
If the individual chooses to have the taxes discharged as part of the bankruptcy proceedings, they will need to file a Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. This form is used to show the IRS that the individual has discharged the taxes as part of the bankruptcy proceedings.
The individual will also need to file a Form 1099-C, Cancellation of Debt. This form is used to show the IRS that the individual has discharged the debt. The form will need to be filed for each year that the taxes were discharged.
It is important to note that the individual is still responsible for paying the income taxes even if they are discharged as part of the bankruptcy proceedings. The only difference is that the individual will not need to pay the taxes in full. They can enter into an agreement with the government to pay the taxes over a period of time or have the taxes deferred.
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