Practice Test Geeks(CBS) Certified Bankruptcy Specialist Practice Test
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CBS Tax Implications of Bankruptcy Flashcards

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

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

    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.

  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?

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

    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.

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

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

    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.

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

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

    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.

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

    Answer: Chapter 13

    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.

  6. What IRS form does a creditor use to report a cancelled debt to both the IRS and the debtor?

    Answer: Form 1099-C (Cancellation of Debt)

    Creditors must issue Form 1099-C to the debtor and the IRS when $600 or more of debt is cancelled, reporting the amount of forgiven debt.

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