A Tax Professional’s Bankruptcy Accounting Guide

A Tax Professional’s Bankruptcy Accounting Guide


As 2020 continues, bankruptcy attorneys are gearing up for an especially busy season ahead. With 30 million people collecting unemployment in the US, it is estimated that over 7 million people are behind on their car payments, with 1 in 3 people unable to pay at least 1 bill. Our nation is facing extraordinary times and at this moment, tax professionals have a unique opportunity to restore hope for many of those facing mountains of debt.  Here are some tips and bankruptcy accounting guide for tax pros:


How A Tax Pro Can Help

Regardless of whether one’s financial hardship has been brought on by poor money management, bad investments, unexpected emergencies, or an economic crisis, tax professionals play a critical role in the road to recovery. Your expertise allows you to see the big picture, providing your clients with the facts and helping them weigh their options — including bankruptcy. 


When Might Bankruptcy Be a Good Option

Determining the best path for your client starts with a conversation regarding the nature of the debt they are carrying. If the individual owes back taxes to the IRS, that amount could be dischargeable in bankruptcy. Of course, bankruptcy is a major life decision and you want to make sure the individual has enough debt to make that route worthwhile. If the client is considering bankruptcy solely due to IRS debt, there are often better options such as installment agreements, waiting out the statute of limitations, etc. But in some cases, filing bankruptcy is what needs to be done in order to best care for one’s family. 


Calculating Dischargeable Debt in Bankruptcy

The scope of dischargeable tax debt will largely depend on the Chapter under which bankruptcy is filed as well as the due dates, filing dates, and assessment dates of the tax returns in question. You can check out our article How to Identify Dischargeable Debt in Bankruptcy for instructions on manual calculation, or better yet, IRS Solution members have access to our new Bankruptcy Discharge Calculator. The calculator does the work for you, computing the earliest date that taxes could be discharged in bankruptcy. This knowledge is particularly important because filing before this date could spell disaster for your client and we encourage members to take full advantage of this free tool. 


Helping a Client Who Has Already Filed for Bankruptcy

Sometimes, taxes are not dischargeable in bankruptcy and the client will need your help creating an alternate plan. Other times, the tax may be discharged but a Notice of Federal Tax Lien may still attach to assets owned by the taxpayer. In certain circumstances, the IRS might make a mistake and not properly discharge the tax as they should have. An opportunity then exists for the accountant to assist the taxpayer in resolving the remaining debts through an offer in compromise, an installment agreement, or through pursuing an uncollectible status.


Working with Bankruptcy Attorneys

Since accountants cannot give legal advice and most attorneys don’t like to give tax advice, there is a symbiotic relationship to be established between accountants and bankruptcy attorneys. First and foremost, attorneys need back taxes to be filed in order to pursue bankruptcy. Then, bankruptcy attorneys will often ask an accountant to analyze the dischargeability of IRS taxes. The accountant can also help the attorney keep the IRS at bay while the attorney strategizes the correct way to file the bankruptcy. Once the taxpayer comes out of bankruptcy, if all taxes were not discharged or if a lien continues to attach to an asset, the client will need your help as well. Similarly, tax professionals can also refer clients to the attorney, so the relationship is mutually beneficial. We’ve recently added a very valuable Prewritten Networking Letter to our Marketing Toolbox for members. We strongly recommend that you download the letter and share it with bankruptcy attorneys in your area. 


A Need for Support

The stress and emotional toll of a financial hardship are especially amplified when it involves debt to the IRS. Even if bankruptcy is an option, many taxpayers initially associate the idea with shame or embarrassment. As a tax professional, you can abolish that stigma and reassure clients that bankruptcy law was written to give them a fresh start. You have the power to restore hope and bring families peace of mind during this extraordinarily difficult time. Should you need your own support, we’re here for you too. IRS Solutions is more than a tax resolution software. The moment you become a member you join a community of experts 100% committed to your success.

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