Square One: Considerations for Business Bankruptcy

debt restructureFor businesses faced with tough economic conditions and mounting debt, bankruptcy may be an option.


In recent months, our tax attorneys have seen an uptick in clients requesting background and assistance in navigating overwhelming business conditions—staying solvent and current on payments when little to no money is coming through the door.


Forecasts from the US Chamber of Commerce suggest 43 percent of small businesses are quickly arriving at the threshold for permanently closing their doors. Almost half of small business owners feel it could take six months to a year before stable conditions resume. 


As we discussed recently, the country is currently awash in large and small businesses looking to US Bankruptcy Court for economic relief. Keeping tax and debt restructuring in mind, bankruptcy could be an option to move a business onto more stable footing when the country begins its climb out of pandemic-induced instability.


Here are some points to keep in mind:

  • There are several methods for addressing tax debt with the Internal Revenue Service (IRS). Regardless of business struggle, the IRS does not simply look the other way on a sizeable tax liability. The posture of the IRS toward your tax arrears depends on the circumstances of the debt and your reasonable collection potential (RCP). Your RCP is essentially a past and future look at what the IRS believes a business or individual can pay. Addressing tax issues outside of bankruptcy can take the form of an Offer in Compromise, partial pay, or an installment agreement.
  • In employment tax disputes, the IRS will pursue business owners individually through trust fund recovery actions. These matters are initiated by the IRS when it can be shown a responsible party hampered or failed to turnover required payroll taxes. Trust fund recoveries are not dischargeable through a bankruptcy proceeding.
  • While bankruptcy actions are generally billed as providing a “fresh start” to a business or individual debtor, discharge of tax obligations during bankruptcy is governed by the Internal Revenue Code (IRC). While business income taxes can be dischargeable in bankruptcy, that discharge is conditioned by the requirements of the IRC, including the timely filing of returns in terms prior to the petition date. Catching up on federal and state tax returns just prior to filing for tax relief under the bankruptcy code is not likely to result in discharge of that debt. 


Make informed decisions when your business needs help with a tax or debt burden. Knowing your options helps you respond to the current business climate, instead of reacting further down the line. When you need to chart the road ahead, work now with an experienced tax professional.


Cleveland tax lawyers provide strong representation when you face IRS tax challenges

The legal team at Robert J. Fedor, Esq., LLC represents business and individual clients responding to allegations of filing a fraudulent tax return, tax fraud, or tax litigation. When you need experienced tax advice locally or internationally, call 800-579-0997 or contact us.


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