Understanding the Tax Implications of Debt Workouts & Restructurings
  • March 22, 2022
  • admin
  • 0

Ever since the outbreak of the pandemic back in 2020, organizations, as well as individuals, have been finding it increasingly challenging to honor their tax obligations. That explains the rapidly increasing number of applications received for debt workouts and restructuring. While the tax authority offers numerous IRS debt relief provisions to help taxpayers to find their way out of tax liabilities, there could be certain tax implications that the applicants should know before they file their applications, starting with some basics.

Bankruptcy Status

Requests for debt workouts and restructurings can be filed irrespective of whether or not a taxpayer is applying for bankruptcy. The tax implications, however, will partly depend upon whether the applicant has filed for bankruptcy. The structure of the transaction is the second factor that comes into play to decide the tax ramifications. It is, therefore, important to talk to an IRS tax attorney, who can analyze the dynamics at play and devise a suitable plan.

Related Blog Post: Think You Can Evade IRS Taxes? Here’s a Wakeup Call

Income Exclusion

Any income that may stem from the cancellation of debt is not to be included in the gross income of a bankrupt or insolvent individual or organization. In cases of non-bankruptcy, the maximum allowed exclusion is the amount of the taxpayer’s insolvency. If an organization is considered a partner for tax purposes, the insolvency is determined at the “partner” level and not the partnership level. If the owners of an insolvent partnership are financially stable, they may not be able to exclude any COD income realized in the workout of the partnership’s IRS tax debt.

Tax Attributes Reduction

If a bankrupt or insolvent organization excludes any income from cancellation of debt, it is required to reduce the tax attributes. In such cases, the taxpayer can refer to sections 108(b) and 1017 to find out the corresponding rules that govern the reduction of the taxpayer’s basis in the property owned by them at the beginning of the first year after the discharge, which is generally by the amount(s) excluded from the gross income.

Related Blog Post: Tax Liens: What is a Tax Lien Certificate?

Group Attribute Reduction

If a taxpayer is a “group of corporations”, they need to file consolidated federal income tax returns, complying with an additional set of attribute reduction rules. These rules may result in attribute reduction to not only the member of the consolidated group realizing any income from cancellation of debt, but also to other consolidated group members. In general, consolidated return regulations apply a “look-through and across” rule in determining the applicable attribute reduction.

Wrap Up

When considering debt workouts and restructurings, it is important for taxpayers to understand that the most “tax-efficient” method depends upon their particular circumstances. That is the reason why it is important to rope in an experienced Dallas tax lawyer, who can analyze the dynamics at play and come out with a tailored way out. If you are looking for IRS tax debt relief, look no further than the Law Offices of Nick Nementh. For a no-obligation free consultation, simply call (972) 426-2553.

Please follow and like us:

What Our Clients Have to Say

Susan WilsonSusan Wilson
03:27 25 Jan 23
I have been very pleased with the solid counsel and guidance that Nick Nemeth has provided me regarding my tax issue. I found him to be honest and straightforward which I appreciated. I was impressed with his relevant experience and knowledge . He has definitely brought me peace of mind during a difficult and stressful time.
Sarah HowardSarah Howard
03:44 14 Nov 22
I would like to thank Mr. Nick and his staff for the superb help that I received from them. My IRS problem was resolved quickly and efficiently. It took 2 visits to convince me that I was over my head. I thought that I could call the IRS, appeal my tax notices and settle on a payment plan on my own. After many phone calls to the IRS, waiting sometimes more than 4 hours with no resolution to speak of, it proved to be extremely difficult and stressful. Revisiting Mr. Nick was a huge wake up call. My account was reviewed, and a payment plan was established with the IRS within a week. I will be forever grateful to the staff who worked on my case and especially to Lorna who listened to me vent while going through this painful process.
00:33 07 Aug 22
I cannot say enough good things about Nick and his team. When I first met with Nick he was up front, honest, friendly and efficient. When I worked with one of his attorneys, Eric B, I was just as pleased. All of the staff there are nice and very helpful. I wish I hadn't waited so long to get help with my issue. Over 6yrs I tried getting through and getting anywhere with the IRS and hardly made any progress. I know this may not be the case for all, and even I thought it would take longer than it did, but 3mos and they had my situation straightened out. I still can't believe it. Thank you thank you THANK YOU for all that you did for me. This is a huge burden gone out of my life now thanks to you. If anyone needs help out there, I know you may not want to shell out more money to get their help but it may just save you in the long run.
Spoilly GirlSpoilly Girl
23:49 03 Aug 22
The Nemeth Law team is exceptional. They treat their clients like a family member who is in crisis. They want you to get the best possible outcome. I really appreciate everything that they did for me. Jake and Ashley had the greatest role in my case and it all turned out for the best for me. Thank you Nick and team for easing my fears and getting me through the long process. I'm truly grateful.
Eddie WaltEddie Walt
19:44 12 Jul 22
During a time in which competent, professional service at a fair price seems to have disappeared, Mr. Nemeth and his team are a refreshing breath of fresh air.From my first phone call to the final settlement of our case with a non-responsive IRS, they under-promised, over-delivered and were in constant courteous contact to make sure we knew exactly what was happening and where we stood.I hope to never need their services again, but, should I receive another friendly letter from the IRS...I know who to call!
Quick Inquiry


    Enter the text you see above