Tax Law

Burdened by Income Tax Debt?

Filing bankruptcy can sometimes lift that burden. Congress passed laws that protect bankrupt taxpayers from the IRS and forgive their tax debt when all three of the following conditions happen:

1. The bankrupt taxpayer filed their tax return for the tax year of the tax debt more than 2 years before the bankrupt taxpayer filed a bankruptcy petition. If you file a tax return before the April 15th deadline then it is filed when you mail the return, but if you asked for an extension then the 2 years is measured from the new extension deadline.

2. The tax is due more than three years before the bankrupt taxpayer files a bankruptcy petition. How do you determine when a tax is due? Look to when you file your tax returns. You file and pay your 2011 taxes on April 15, 2012, so the due date is April 15, 2012, unless you file an extension. If you file an extension then your taxes are due on the extension deadline and that would be the “due date” to measure the 3 years.

3. The tax was assessed within 240 days of filing the bankruptcy petition. How do you know your return was assessed? If your return was selected for an audit, then it is the day the auditor signed the audit report.

There are events that can extend the 2 years, 3 years or 240 day measurements. Here’s one: 

If you submit an offer and compromise during these time period then however many days, months or years it took for the offer to be submitted and rejected will add to the 2 years, 3 years or 240 day measurements.

If you have burdensome tax debt it is wise to determine exactly when you can file a bankruptcy. Filing your bankruptcy even one day to soon will prevent the discharge of tax debt and affect you financially for a long time.

How to Dispute an Erroneous 1099

First, contact the issuer and ask them to file a corrected 1099 based on the proof you will provide, if they need it. It may just be a simple math error you can fix over the phone. Gather your information before you call the issuer to make sure you are correct and so you are prepared to provide the information immediately. If you are not able to resolve the issue immediately then send via U.S. Certified mail, a cover letter summarizing your proof of the correct amount for the 1099 to the issuer.

If the Issuer still disagrees with you then take the dispute to the next level and either contact the IRS yourself or hire someone. Your action of contacting the Issuer first will be appreciated by the IRS. Will it be quick and easy to resolve the matter? Each case is different; in the end the IRS may agree or disagree with you. While it may seem burdensome to dispute, it is also wise to take on the burden of disputing the incorrect amount to avoid paying more taxes or running into trouble with the IRS.