Declaring bankruptcy is the last method that you can use to solve the tax problem. But proper care must be taken if you are going for this method because if IRS finds that you have cheated them then severe actions will be taken against you. So, before choosing this method, consult a tax relief professional to see if this is the best choice for you.
In order to get the tax benefits under the bankruptcy then you must file a petition for bankruptcy in the bankruptcy court. Once this petition is filed, a bankruptcy estate will be created. It includes all the assets and properties of the person who files the bankruptcy petition. In order to create a separate taxable entity the petition must be filed under chapter 11 or chapter 7. These chapters belong to the bankruptcy code. The tax benefits to be obtained depend on the chapter in which the bankruptcy petition is filed. It is highly advised for a person to use an attorney or tax attorney when dealing with bankruptcy. If the person is forgiven by the bankruptcy court then the tax that he had to pay to the IRS will be cleared. But, it also does not allow this individual to receive the normal tax benefit that most taxpayers receive. So, you must think twice before filing a bankruptcy petition. This method should only be used if you have exhausted all other options. It is likely that the IRS will allow you to settle your tax debts in some other fashion if they know you are going to declare bankruptcy.
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There are 5 rules put forward by the bankruptcy code. If the tax debt of the bankruptcy filed person satisfies these 5 rules then only his petition will be approved. The first rule is regarding the due date for tax return filing. This date should be at least 3 years ago. The second rule is that the return must be filed at least 2 years before. The third rule deals with the age of the tax assessment and it should be at least 240 days old. Fourth rule says that the tax return must not have been completed with the intent of fraud. According to the fifth rule the person must not be guilty of tax evasion.
If you are are strongly considering bankruptcy as a tax relief method you should consult with a tax professional before doing so. Most of the time, the tax benefit and savings in money you receive from bankruptcy are no better than other tax settlement methods that are offered for individuals with severe financial problems under IRS code. If you settle with the IRS, you will be considered to be in good standing with them and you will receive normal tax treatment in the future but this is very different with bankruptcy.
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