CBS CBS Tax Implications of Bankruptcy 2

Question 1

What is 'cancellation of debt' (COD) income and how does bankruptcy affect it?

Accepted Answer

Income recognized when a debt is forgiven; bankruptcy provides an exclusion from gross income under IRC Section 108

Answer

COD income arises when a creditor cancels a debt, which the IRS treats as taxable income; however, IRC Section 108(a)(1)(A) excludes COD income from gross income when the discharge occurs in a Title 11 bankruptcy case.

Question 2

A debtor files Chapter 7 and owes income taxes from 5 years ago — the return was filed on time and the IRS assessed the tax 3 years ago. No fraud was involved. Are these taxes potentially dischargeable?

Accepted Answer

Yes, because the 3-year, 240-day, and no-fraud requirements are all satisfied

Answer

Income taxes may be discharged in bankruptcy when (1) the return was due more than 3 years ago, (2) the IRS assessed the tax more than 240 days ago, and (3) the return was not fraudulent — all three are satisfied here.

Question 3

What is the 'two-year rule' for income tax debt dischargeability in bankruptcy?

Accepted Answer

The debtor must have actually filed the tax return at least 2 years before the bankruptcy petition date

Answer

Under 11 U.S.C. § 523(a)(1)(B)(ii), taxes are non-dischargeable if the return was filed less than 2 years before the bankruptcy petition, regardless of when the taxes were due.

Question 4

How does the automatic stay affect IRS tax collection activities after a bankruptcy filing?

Accepted Answer

The automatic stay temporarily halts most IRS collection actions including levies, garnishments, and property seizures

Answer

The automatic stay under 11 U.S.C. § 362 generally halts IRS collection activities, though the IRS may seek relief from the stay or continue certain permitted actions such as tax audits and assessments.

Question 5

Which bankruptcy chapter allows a debtor to repay non-dischargeable priority tax debts in a structured plan without ongoing interest penalties?

Accepted Answer

Chapter 13

Answer

Chapter 13 allows individuals with regular income to repay non-dischargeable priority tax debts over a 3-to-5-year plan, often halting penalty accrual and providing an organized repayment structure.

(CBS) Certified Bankruptcy Specialist Practice Test

(CBS) Certified Bankruptcy Specialist Practice Test

CBS CBS Tax Implications of Bankruptcy 2