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IRS officials and tax experts discuss how BAPCPA affects Chapter 7 and Chapter 13 bankruptcies for individuals.
WASHINGTON, DC (July 13, 2006) — On the July 11 Webcast of Tax Talk Today, an expert panel of IRS officials and tax experts discussed the impact of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) on the tax administration, particularly as it affects Chapter 7 and Chapter 13 bankruptcies for individual debtors with tax liabilities.
Effective on October 17, 2005, BAPCPA has changed the landscape of bankruptcy filings for tax professionals. While the same three options for bankruptcy filings exist — Chapter 7 Liquidation, Chapter 13 and Chapter 11 Reorganization — there are significant changes in terms of means testing, educational requirements for credit and debt counseling and procedures that include filing tax returns for taxable periods ending four years before the petition date.
Failure to comply with these and other requirements set forth in the legislation can lead to dismissal, or can result in a Chapter 7 Liquidation instead of a Chapter 13 bankruptcy.
"Congress was very concerned with what they perceived were abuses in the bankruptcy system," said Edward J. Laubach, Jr., senior attorney, Office of Chief Counsel, IRS.
According to Tommy Mathews, director, Office of Advisory, Insolvency & Quality, IRS, the "creditor-friendly" BAPCPA prompted a flood of bankruptcy filings in the months prior to the new law's effective date. That flood was reduced to a trickle after the legislation went into effect, with Chapter 7 and Chapter 13 filings down by as much as 40 percent compared to the previous year. Tax professionals are seeing the same drop in bankruptcy cases.
"It's a dramatic impact," said David Miller, attorney. "There was such a glut of work that dropped off to nothing."
"Most of the experts are saying there is going to be some recovery in filing," said Mathews. "That may be the case; we just haven't seen it yet."
The new BAPCPA regulations provide clear guidelines regarding which tax returns can be discharged as a part of the bankruptcy proceeding. Generally speaking, there are three types of taxes that qualify for discharge: returns filed in a timely fashion, within three years of the presumptive due date of the return; returns filed late, within two years of the filing date; and any filed returns that have been audited by the IRS more than 240 days before the date of the bankruptcy petition.
"These are cast in stone," said David M. Levine, EA, principal, DML Consulting. "There's no wiggle room."
In a special Tax Talk Today segment, the IRS also provided an update on the tax gap. According to Angela Kraus, Director, SB/SE Stakeholder Liaison HQ, IRS, the net tax gap for 2001 was approximately $290 billion. The IRS has invited outside stakeholders, including the tax practitioner community, to submit ideas to help reduce the tax gap. To submit an idea, tax practitioners should contact their local stakeholder liaison.
Several legislative proposals currently under way could also help shrink the tax gap by increasing third-party reporting requirements.
"We're definitely making progress, but in order to make a significant impact, it's going to take more than just IRS efforts," said Kraus.
A full transcript of this month's Webcast — titled "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)" — can be accessed at: http://www.taxtalktoday.tv/index.cfm?page=5.71.
Tax Talk Today is brought to you by the IRS. The next Webcast, "Collection and Examination Compliance Update," will be Tuesday, September 12, from 2 - 3 p.m. ET.
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