Ranking Tax Debt in Bankruptcy - John R. Dundon II, Enrolled Agent
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Ranking Tax Debt in Bankruptcy

Ranking Tax Debt in Bankruptcy

According to IRS Publication 908, Bankruptcy Tax Guide, generally the automatic stay rules prevent a creditor from taking actions to collect debts incurred before a bankruptcy petition is filed. However automatic stay rules do not universally apply. Exceptions include an IRS exam to determine tax liability, a demand for tax returns, IRS notice of deficiency issuance, assessing tax or sending a demand for payment of assessed tax.

Taxes incurred during administration by the bankruptcy estate are given second priority treatment as administrative expenses.

Taxes arising in the ordinary course of your business or financial affairs in an involuntary bankruptcy case, after the filing of the bankruptcy petition but before the earlier of the appointment of a trustee or the order for relief, are included in the third priority payment category.

If you have employees, your employees’ portion of employment taxes on the first $10,950 (this amount adjusted every 3 years) of wages that they earned during the 180-day period before the date of your bankruptcy filing or the cessation of your business (whichever occurs first) is given fourth priority treatment. Your portion of the employment taxes on these wages, as the employer, is given eighth priority treatment.

Also some tax debts that arose before a bankruptcy case is filed are classified as eighth priority claims including:

  1. Income taxes on gross receipts for a tax year ending on or before the date of the filing of the petition plus the previous 3 years for which a return, if required, is last due, including extensions.
  2. Income taxes on gross receipts assessed within 240 days of the filing of the petition exclusive of any time during which an offer in compromise is pending plus 30 days.
  3. Income taxes that were not assessed before the bankruptcy petition date, but were assessable as of the petition date, unless these taxes were still assessable solely because no return was filed, a late return was filed within 2 years of the filing of the bankruptcy petition, a fraudulent return was filed, or because the debtor willfully attempted to evade or defeat the tax.
  4. Withholding taxes.
  5. Employer’s share of employment taxes on wages, salaries, or commissions including vacation, severance, and sick leave pay last due within 3 years of the filing of the bankruptcy petition, including a return for which an extension of the filing date was obtained.
  6. Excise taxes on transactions occurring before the date of filing the bankruptcy petition, for which a return, if required, is last due including extensions within 3 years of the filing of the bankruptcy petition.