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Handling Tax Matters in U.S. Bankruptcy Court

Large tax liability can feel like an inescapably heavy burden to an individual or a company. Even a well-negotiated repayment plan can bury a taxpayer in debt. Interests and penalties continue to accrue during repayment, causing the original tax liability to snowball. However, tax liability is not inescapable.

Brown, PC represents large corporations and wealthy individuals in multi-million dollar tax disputes. Our clients include top athletes, businesspeople, entertainment celebrities, and corporations whose names are recognized globally. Our clients have their assets, their reputations and futures at stake when faced with a tax dispute. Our forte is strategizing the best path to protect our client’s assets through aggressive litigation while working closely with our strategic communications team to mitigate damages to our clients’ reputation and brand.

Our partner Lawrence Brown has 25 years of experience and a background as a DOJ Tax Division trial attorney. Having been in the government’s position, Mr. Brown is keenly familiar with their tax debt negotiating tactics and parameters. He also maintains cordial professional relationships with government attorneys that facilitate negotiations when beneficial to our clients.

At Brown, PC we know when negotiating with the IRS can yield a successful solution and when to recommend litigation as the best means of relief. We may also advise our clients to file for bankruptcy to effectively dispose of tax liability while preserving significant assets that would otherwise be subject to seizure and levy. For a business, liquidation of assets is often not only unreasonable, it can also be detrimental to the business’s operations.  This is an outcome we can often avoid through tax bankruptcy proceedings.

Why File for Bankruptcy to Mitigate Tax Liability?

One of the single most important decisions in tax litigation is choosing the right forum for resolving the dispute. Taxpayers can litigate in U.S. Tax Court, U.S. District Court or the U.S. Court of Federal Claims. Alternatively, a taxpayer may elect to file for Chapter 7, Chapter 11 or Chapter 13 bankruptcy.

Although bankruptcy is not typically employed, the process offers a crucial option for certain taxpayers. We may recommend bankruptcy to accomplish several objectives, including to:

  • Release seized property and stay collections

A bankruptcy petition stays collection proceedings by all creditors, including the IRS. In addition, the IRS must release property the agency has seized back to the taxpayer. This advantage is especially crucial for clients who owe the IRS millions of dollars and have substantial assets, but not enough to pay the IRS at the time.

  • Reduce the amount ultimately paid to the IRS

There are many reasons why a payment arrangement during bankruptcy typically results in lower payments per installment and overall liability.  First, a Chapter 13 installment arrangement stops the accrual of interest and penalties. Second, older tax debt may be considered non-priority and so payable by pennies on the dollar. Finally, the court establishes a payment plan based upon the amount the debtor is able to pay each month, with remaining debt dismissed upon expiration of the payment period.

  • Reduce IRS collection period

The Chapter 13 repayment period is between 36 and 60 months, a much shorter time than the IRS collection period of 10 years. As a result, taxpayers are able to move forward from the dispute much sooner and pay less of the tax debt.

  • Stop interest and penalty accrual

Chapter 13 stops accrual of interests and penalties that would otherwise add substantially to the original tax debt. Because our clients generally owe an original tax liability that amounts to millions of dollars, relief from the interests and penalties is substantial.

  • Take action against unreasonable treatment of the taxpayer

“Cram down” refers to a process by which a priority debt is downgraded to non-priority. A cram down option may be available for older tax liabilities under Chapters 11 and 13 petitions. 

Why Consider Bankruptcy as a Means to Tax Debt Relief?

Many lawyers, accountants and tax professionals may do all they can to steer their clients away from bankruptcy. This approach misses an important option for taxpayers who own considerable assets and are unable to pay a substantial tax liability without putting their wealth or business in jeopardy.

The taxpayer might not refute the amount the IRS has assessed or may not have a strong argument to make before the court. Therefore, litigation may not be the best approach to the case. In these situations, our attorneys are often able to negotiate with the IRS to arrange a payment plan that is fair and manageable. Unfortunately, the IRS also often acts unreasonably and refuses to agree to a viable, equitable solution. We may then take settlement off the table and pursue the bankruptcy remedy.

Bankruptcy has the additional advantage of effectively dealing with state tax debt, as well as federal taxes. Moreover, because the business or individual is likely to have numerous other creditors, bankruptcy offers a valuable means of relief. Like the IRS, other creditors cannot pursue a lien on property or continue with collection proceedings.

When we meet with our clients our attorneys calculate the advantages and disadvantages of filing for bankruptcy. If we decide that bankruptcy can put our client in the best position, we evaluate the type of petition that is most suitable. We may recommend liquidation or a payment plan depending upon which results in the greatest wealth retention after asset preservation and debt relief are considered.

Upon conclusion of the bankruptcy, the judge discharges all remaining debts, except those that are exempt or that the client has opted to reaffirm to retain attached collateral.

Learn More about U.S. Bankruptcy Court as a Means of Disposing of Tax Liability

Bankruptcy is an important option for some taxpayers to dispose of excessive tax liability.  A Fort Worth tax lawyer at Brown, PC can advise when Chapter 11 or Chapter 13 is the appropriate means of achieving tax liability relief.

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