IRS Publication 908

What is IRS Publication 908

IRS Publication 908 is a document published by the Internal Revenue Service (IRS) that provides information on how federal income tax should be treated in the case of bankruptcy. IRS Publication 908 does not cover bankruptcy laws in detail, and is designed to give basic information.

BREAKING DOWN IRS Publication 908

The bankruptcy laws are designed by Congress to give honest debtors a financial fresh start. A bankruptcy filing creates the “bankruptcy estate”, which consists of all of the assets the individual or entity owns on the date the bankruptcy petition was filed. The bankruptcy estate is treated as a separate taxable entity for individuals filing bankruptcy petitions under chapter 7 or 11 of the Bankruptcy Code. The court appointed trustee (for Chapter 7) or the debtor-in-possession (Chapter 11) is responsible for preparing and filing all of the bankruptcy estate’s tax returns.

A separate entity is not created for partnerships or corporations filing for bankruptcy, and their tax filing requirements do not change, though the business itself no longer files the tax return. For a partnership, the responsibility to file the required returns becomes that of the court appointed trustee, receiver, or debtor-in-possession. For a corporation, a bankruptcy trustee, receiver, or debtor-in-possession, having possession of or holding title to substantially all of the property or business operations of the debtor corporation, must file the debtor’s corporate income tax return for the tax year. IRS 908 also deals with how tax-free reorganization between corporations may be allowed under a bankruptcy proceeding.

Generally, when a debt owed to another person or entity is canceled, the amount canceled is considered income taxable in the hands of the person owing the debt. If a debt is canceled as part of a bankruptcy proceeding, the amount canceled is not considered income, but the canceled debt reduces other tax benefits to which the debtor would otherwise be entitled.

If an entity declares bankruptcy before filing a tax return or obtains an extension before bankruptcy proceedings begin, the IRS can ask the court to either dismiss the case or change the chapter filed. If the entity does not file a return or obtain an extension after 90 days, the court is required to dismiss the case or change the chapter filed.