IRS Debt? 7 reasons bankruptcy is often used to deal with it

idea_lightbulb_cartoon2-thumb-375x491-53213IRS Debt and Bankruptcy

No one likes bankruptcy, except bankruptcy attorneys.  For most Americans, it remains a very negative process.  In fact…many of our clients refuse to even consider bankruptcy during a first meeting.  I don’t blame them.  It is interesting however, how many of those who are initially so opposed, change their minds once they see the potential benefits.

Why is bankruptcy such a mind changer?  Some quick background:

The Bankruptcy Code, which is updated occasionally by Congress, reflects our Nation’s desire to provide a fresh start for debtors. The Code attempts to create a system that forces those that can afford to pay their debt out, and allows those that can’t…in.

This balancing process between “who should and who shouldn’t” is applied to tax as well. Certain types of tax are considered so important by society that the bankruptcy code doesn’t allow for them to be wiped away (discharged). “Trust fund” taxes like taxes that are withheld from an employee paycheck to be forwarded to the government by the employer, are a common example.

Income taxes don’t warrant the same concern, and therefore the bankruptcy code provides for their discharge in specific circumstances. Those circumstances are as follows:

  • The tax return had to be filed more than two years before the bankruptcy filing.
  • The tax return had to be due for filing more than three years before the bankruptcy filing.
  • The tax debt had to have been “assessed” or entered into the IRS record as a debt, more than 240 days before the bankruptcy filing
  • The taxpayer didn’t file a fraudulent return.
  • The taxpayer didn’t engage in tax fraud more generally or engage in tax evasion.

These dates are found in the Bankruptcy Code sections 507(a)(8)(A)(i), 523 (a)(1)(B) and 507(a)(8)(A)(ii).Of course you realized while reading this list that nothing is ever that simple, and for a number of reasons you are right.

  • The first reason is that in an effort to be fair to the debt collectors at the IRS, the Bankruptcy Code requires that the clock stop ticking in certain circumstances. Circumstances like time spent in a previous bankruptcy, collection due process appeal, or offer in compromise.  It is not always easy to calculate these time periods as a result. Also, the taxpayer has to wait for these time periods to pass. In the meantime, the IRS is aggressively looking for money.

So if the date calculations are complex, and the tax lien can negate many benefits of the discharge…why such a mind changer?The primary reasons:

1.  The Bankruptcy Code controls the Tax Code

If the taxpayer meets the various bankruptcy qualification criteria and the tax debt meets the requirements for discharge, the IRS has little say in the matter. This isn’t a subjective decision on it’s part. It has to do what is told. If it doesn’t i.e. it tries to collect the debt when it wasn’t supposed to, the taxpayer can sue. This is as opposed to trying to deal with the IRS directly in an offer/installment/other situation where the IRS is the decider of facts and the applier of the law.

2.  Bankruptcy can be a “one-stop” shop

Many people with serious tax debt have other serious debt as well. If planned well, bankruptcy can deal with all of the problems at one time and some that many don’t realize were “fixable”. Not only can income tax and consumer debt be dealt with, but cars can be “crammed down” to market value, homes saved, and assets protected. All legal options provided by the tax code, deal with the tax debt only.

3.  The lowest debt settlement program is the no asset chapter 7 bankruptcy

Where the bankruptcy trustee in a chapter 7 bankruptcy is unable to collect any assets for liquidation and distribution to creditors, which is a common occurrence, the IRS will get nothing as well. This amount is always less than the settlement amount in an offer in compromise.

4.  Offers in Compromise don’t work for many

The vast majority of offers in compromise filed in the U.S. fail. There are a number of reasons. Some of them are:

a.  Legal standards do exist that govern how the IRS should view the offer to compromise the debt, but they are…a bit loose. Loose enough that the IRS is able to inject a great amount of subjectivity into the process. Bankruptcy on the other hand, creates quantifiable results based on objective criteria. Offer in compromise results are all over the place.

b.  These legal standards have a lot to do with what the IRS thinks you can afford to pay toward the debt over time. The starting point for household budgets is very low and is usually much lower than the taxpayer’s actual budget. The IRS doesn’t have to consider certain budget items at all, like consumer debt payments and savings plans. This usually results in a large discrepancy between what the IRS thinks the taxpayer can afford and what the taxpayer thinks he can afford.

c.  Failure is costly. Most need legal representation and that costs money. Most/all of which doesn’t get refunded when the offer fails. Most have to pay some large amount to file the offer (20% of cash offer amount, or monthly payments based on the offer amount) which isn’t refundable when the offer fails. The debt continues to grow in the background thanks to interest, and when the offer fails all the new debt is waiting with hat in hand and even a smile.

5.  High income taxpayers don’t always have to “qualify” for a chapter 7 bankruptcy

There is an exception in the bankruptcy code to the requirement that all who file chapter 7 bankruptcy must pass a test of ability to pay debt. Where the majority of the debt is tax debt, this rule doesn’t always apply. As a result, many who wouldn’t be able to even hope for an offer in compromise, are able to use bankruptcy to discharge the debt.

6.  Many with serious tax debt don’t have large assets

Most taxpayers with serious tax debt, will see the IRS record a Notice of Federal Tax Lien. As mentioned above, that lien attaches to all assets. When the bankruptcy is filed and the underlying debt is discharged, the tax lien remains and is in essence a secured debt. It’s value is based on the value of the assets on the date of the bankruptcy filing. If the taxpayer owned a home that was “underwater”, a car with $5000.00 in equity and some furniture, the lien is almost worthless and the IRS will often remove it.

7.  Chapter 13 bankruptcy is often a “cheaper” solution then an installment agreement.

The taxpayer may not be a good offer in compromise candidate, and may not be a good chapter 7 candidate because the tax debt is not the greatest part of the overall debt or for another reason. The taxpayer is left with two options: An installment agreement to pay the tax over time and wait out the statute of limitations period, or a chapter 13 bankruptcy.

The installment agreement amount is often much higher than the taxpayer would like. The chapter 13 bankruptcy payment on the other hand, can be based on friendlier budget criteria. In many cases the taxpayer can deal with all of his debt with a smaller monthly payment than the IRS was requiring to deal with the tax debt alone.

5 Commonly Used Ways To Deal With IRS Debt

Faced with large tax debt and feeling hopeless? Take heart…if you are willing to create a “strategy” and combine it with some hard work and patience, there may be a real solution. The following are the most 5 common methods people use to deal with tax debt.

1. Use the IRS Statute of Limitations to Your Advantage

Congress limited the time the IRS has to figure out how to get paid.  26 U.S.C Section 6502 provides this limit and as a result, the IRS has ten years to get the debt collected. Many people with IRS debt buy the time necessary to get to the 10-year period by negotiating an installment agreement or non-collectible status placement.

An example:

Imagine a tax debt of $120,000.00 and that the IRS has let 7 years pass without fully attempting to collect the debt, but they are now at the doorstep. The debt has grown to $200,000.00 with penalty and interest over time, but the taxpayer can only afford to pay $100.00 per month toward the balance. If the taxpayer were able to negotiate such a payment, only $3600.00 of the $200,000.00 would be paid before the debt disappeared.

The above scenario happens more often than you would think. However, there are things people do that stop the ten-year clock from running. Filing an offer in compromise, a bankruptcy, a collection due process appeal, or anything else that stops the IRS’ ability to collect also stops the statute of limitations clock from ticking. It isn’t always advisable to do anything other than to negotiate the payment plan or non-collectible status as a result.

2. Challenge the Tax Debt

What about a situation where the IRS assessed a debt against you that you know isn’t correct.

Usually, this is the result of an audit “gone bad” or the creation of a tax return by the IRS, because you didn’t file it yourself.

Audit Appeal

IRS Audits that go badly can be appealed. If done right, they can be appealed to the US tax court. If your audit result is wrong, you have a limited amount of time to bring the appeal, so call someone now.

Substitute Tax Return Appeal

Tax returns filed by the IRS come with appeal rights as well. Most people don’t respond in time and lose them, however. Thankfully, the assessment of the tax from the incorrect return can be challenged using the IRS audit reconsideration process.

Challenge Trust Fund Recovery Assessment

There are other things the IRS does to assess tax debt that can result in an incorrect debt amount, like the assessment of the trust fund recovery penalty against a responsible party.

Where the business has withheld the employee portion of the payroll tax but didn’t send it in, the IRS stick the amount on you personally as a penalty if you are the “responsible” party.

There are defenses to this, however, and the assessment of the debt can be challenged as a result.

Innocent Spouse Relief

Sometimes the tax is correct but it just isn’t fair that the spouse should be stuck with it. The law provides the ability to challenge the debt based on some theories about innocent spouses.

3. File an IRS Offer in Compromise

26 U.S.C Section 7122 provides the basis for the settlement or one-time reduction of the tax debt. In essence, you would be making an offer to compromise and settle the back tax liability. But this isn’t horse-trading.  The amount that the law requires the IRS to settle for is based on objective criteria. The criteria is called the IRS reasonable collection potential or the RCP.

In theory, the RCP is the amount that the IRS could collect from you before the statute of limitations period on collection runs out.

The vast majority of offers filed in the last several years fail primarily because the RCP calculation is rigged a bit in the IRS’ favor. The IRS is allowed to use as a starting point for calculation purposes, a budget that is based on averages they have created.

For instance, they may have pre-determined that a family of four only needs $1650.00 per month to pay for all housing and utilities expenses. That family may be actually spending $2100.00 per month. If in the end, the IRS were able to use the $1650.00 figure to determine the RCP, then the amount of extra income per their calculation would be at least $450.00 per month.

If the statute of limitations period remaining on collections is 8 years than the RCP, just based on this number could be as high as $43,200.00

Typically, the IRS must use a smaller multiplier than the statute period, but even then, you can see how quickly the RCP can grow.

Successful Offers in Compromise, require much thought and planning as a result. They shouldn’t be entered into lightly.

4. Bankruptcy

Bankruptcy and its relation to tax debt are misunderstood. Many people including many attorneys believe that bankruptcy can’t resolve income tax debt. Nothing could be further from the truth.

In fact, the treatment of the tax debt is not up to the IRS. The Bankruptcy Code governs the treatment of the debt. The Bankruptcy Code says that income tax and certain other tax debts can be wiped away in bankruptcy, if it meets certain date requirements and the taxpayer didn’t cheat.

Sometimes the date requirements haven’t been met yet and we guide our clients in negotiating a payment plan or non-collectible status to help them avoid collection activity while they wait for those dates to arrive.

5. Penalty Abatement

As a taxpayer, you have the right to request the cancellation of any IRS penalty. There are more than 140 penalty provisions and they all have a good faith exception.

If you have been penalized for something like a failure to pay the tax on time, but you acted in good faith and there exists some reasonable basis for the failure, then the penalty can be removed along with interest on it. This removal often makes it easier for you to deal with the underlying debt.

 

Written By:

Michael S. Anderson, Attorney
2158 N. Gilbert Rd. Ste 101
Mesa, Arizona 85203

Phone: (480) 507-5985
Fax: (480) 507-5988
Email: [email protected]
Website: www.taxlawyeraz.com

Credit Card and Tax Debt? Bankruptcy Might Be The Solution

Large credit card debt is bad enough with it’s high interest rates and payments that never end, but mix in some serious tax debt and you’ve really created a serious problem.

The primary reason the two debts together can be such a problem is that the IRS won’t usually agree to include the full amount of the minimum credit card payments into the calculation of a monthly budget.

When this happens…it creates what we call phantom income. An example:

David owned a small business. The industry he chose wasn’t profitable, and over a period of time he created a large amount of credit card debt to keep the business going. The payments were so big at $1700.00 per month, that he stopped withholding taxes and filing returns. Eventually the IRS caught up to the situation and forced him to file the returns. The debt was large enough with penalty and interest, that a revenue officer was assigned to his case. The revenue officer reviewed all of his finances to determine what he could afford to pay per month. (read more about IRS partial payment plans) The IRS rules allowed the revenue officer to ignore most of the credit card payments as a budget item. The payment plan was imposed and David began making the payments. Within a few months he realized that something had to give and he was forced to choose which type of debt to continue paying.

This situation is common, and this phantom income  forces a person like David to make a difficult choice.

If he can’t settle the IRS Debt in an Offer in Compromise or if the tax debt is so large he can’t use a “time based” payment plan…he is going to have to either stop making the IRS payment risking levy, or stop making the credit card payments…or win the lottery.

Sometimes the solution to this problem is bankruptcy and for a few reasons.

If David qualifies for a chapter 7 bankruptcy, the bankruptcy would discharge his obligation on the credit card debt, removing this phantom income from the equation and providing him the money to actually make the IRS payment.

If he doesn’t qualify for a chapter 7 bankruptcy, a chapter 13 bankruptcy may still help. The chapter 13 bankruptcy may allow him to use a friendlier budget than the IRS allowed him. It would also treat the large tax penalties, the interest on the penalties, and the credit card debt as dischargeable debt. This might result in a payment in the chapter 13 that would be substantially less than the IRS payment plan and the credit card minimums were prior to bankruptcy.

What if some time had passed between the date David entered the IRS payment plan and the date he filed the bankruptcy… making some or all of the tax debt dischargeable debt like the credit card debt.

It’s possible that David would be debt free.

But even if the bankruptcy only got rid of a portion of the tax debt…the reduction in the tax debt amount might allow David the ability to pay the remainder tax debt after the bankruptcy was over using a payment plan based on time rather than his actual finances. With the credit card debt wiped away and the much lower tax debt payment, David would be free to move on with his life.

There are lots of people in David’s situation or at least something similar.

You might be one of them.

If you are, it’s important to have your situation looked at…or analyzed, to see whether bankruptcy might make sense. If it doesn’t…it may in the future.

You’ll want to know that ahead of time so that you can plan accordingly and avoid the phantom income problem.

Written By:

Michael S. Anderson, Attorney
2158 N. Gilbert Rd. Ste 101
Mesa, Arizona 85203

Phone: (480) 507-5985
Fax: (480) 507-5988
Email: [email protected]
Website: www.taxlawyeraz.com

Struggling in IRS Payment Plan? Chapter 13 Bankruptcy May Be the Solution

Many of our clients have large IRS debt and some don’t qualify well to settle their debt in an IRS offer in compromise.  The truth is…most people with tax debt don’t. (Read more about IRS Offers in Compromise and how they work)

If the debt is correct and they don’t qualify to settle the debt in an IRS Offer in Compromise, where does that leave them?

They usually end up in a payment plan either based on time, or in one that uses their actual income, but an un-friendly budget that is partially created by the IRS itself.

The common problem with both of these outcomes is that the client is in a payment plan that is just too big.

The payment doesn’t take into account their other consumer debt, the actual cost of their home, cars, and a great many other expenses.

The client is forced to downsize their budget dramatically and often unrealistically…. causing lots of stress and other significant issues.

For that client, the one stuck in a payment plan with the IRS that doesn’t take into account all of their budget items including other debt…a chapter 13 bankruptcy will often make sense.

In a chapter 13 bankruptcy, the law allows a few things that can make the situation easier and more realistic than a payment plan based on the IRS’ budget.

A chapter 13 bankruptcy, can also allow you the following:

  • Use your actual, reasonable mortgage payment and home related expenses as a budget item
  • Use your actual, reasonable car loan payment as a budget item
  • Use some expenses related to entertainment and miscellaneous items as budget items
  • Ignore your social security related income..as income
  • Treat some or all of your tax debt as dischargeable
  • Treat all of your IRS penalty as dis-chargeable
  • Treat your other consumer and budget related debt as dis-chargeable
  • Cram down the interest rate you are paying on your car
  • Cram down the principal debt on your car where the loan is 2.5 years old and the car is upside down
  • Sometimes pay just a fraction of the debt that is owed on taxes, consumer, and business debt
  • Stop foreclosure and repossession
  • Force all collection activity to stop
  • Force the IRS into a payment plan on new tax debt that takes into account all of the above
  • Protect your assets
  • Resolve all debts either by discharge or payment within 60 months except non-dischargeable/non-priority tax debt.

If you are in a payment plan with the IRS and are finding it difficult….this list may sound pretty good.

But…before you meet with me about it, you need to understand that there are things that make a chapter 13 difficult and sometimes impossible as well.

PAYING WHAT’S REQUIRED TO BE PAID

In a Chapter 13 Bankruptcy, you must be able to make a payment that’s large enough to pay certain items like:

  • Priority Tax Debts – tax debts that are too new to be treated as dischargeable
  • Priority Child Support and Spousal Maintenance arrears – if you are behind on either the arrearage is paid through the plan
  • Car Loans with Interest
  • Attorney Fee and Chapter 13 Trustee Fee
  • An amount to general unsecured debt that equals the value of your non-exempt assets
  • Home Mortgage and HOA Arrears
  • An amount to general unsecured debt that satisfies the means test results

For most people with large tax debt and an inability to use an offer in compromise, this list though difficult at first glance, is typically doable and it will leave them with much more money in their living expense budget than the IRS payment plan did.  (We wouldn’t let you file a Chapter 13 Bankruptcy unless that were true)

LACK OF A STEADY INCOME

A lack of a steady income is a chapter 13 killer.  It doesn’t matter where that income comes from…it it’s going to be regular and steady, the odds of a successful chapter 13 bankruptcy go up.  If income is going to drop dramatically during the plan….or go up dramatically during the plan…the plan may not make sense and if filed will probably fail.

LATE TAX RETURN FILINGS

The last 4 years returns have to be filed in a Chapter 13 Bankruptcy.  If they aren’t, the case will be dismissed.  For our tax debt clients, this is sometimes a problem.  But there are good reasons why filing the returns are helpful besides keeping your plan alive.  We need to know whether you owe the IRS or not before filing and how much.

YOUR DEBTS CAN’T BE TOO HIGH

You can’t use chapter 13 Bankruptcy if your debts are too high.  The vast majority of people don’t have debt that comes anywhere close to these debt limits…but a few do.

Sometimes we use a chapter 7 first to get a client’s debt within the limits… and then we use the Chapter 13 to get those benefits.

IT’S A BUSINESS

A business can’t use a chapter 13 bankruptcy.  The owner of a business can, a sole proprietor can, but not the business itself.

Many business owners file chapter 13 and use it to deal with debts it shares with the business while leaving the business liable for the debt.

A sole proprietor is the business. There isn’t a separate entity that will continue to owe the debt.

A CHAPTER 7 MIGHT MAKE MORE SENSE THAN A CHAPTER 13 BANKRUPTCY AND AN IRS PAYMENT PLAN

What if you qualify to file a chapter 7 bankruptcy instead of a 13.  What if you pass the means test or the greatest portion of all your debt is tax debt (or other non-consumer debt).  A chapter 7 bankruptcy may make more sense.   It may allow you to get rid of other debt and some or all of your tax debt.  Even if not all of your tax debt were wiped away…enough may be wiped away that you could re-negotiate a payment plan with the IRS that is much friendlier to your budget.

Bankruptcy and IRS Debt – A Real Option

Misconceptions.  The one we hear the most is that the bankruptcy code can’t help you deal with IRS Debt.  The truth is:

YOU CAN DISCHARGE IRS TAX AND PENALTY USING BANKRUPTCY… IF YOUR SITUATION IS RIGHT

The law does require that income tax and other non-trust fund type tax debt be discharged as a personal obligation if it meets certain date and other criteria.

The fact is that IRS debt is wiped away by the Bankruptcy Code all the time.  We’ve helped our clients get rid of millions in tax debt via bankruptcy.

However, even if the tax debt meets the criteria for discharge in bankruptcy…it may not make sense for you to use it given your unique circumstances.  It’s important to have experienced counsel analyze your situation before proceeding.

WHAT ARE THE RULES FOR DISCHARGE OF IRS DEBT?

The rules are straightforward:

  • The tax debt must be non-trust fund tax debt. It has to be your tax debt, not trust fund taxes (payroll).
  • It has to meet date requirements. 3 years from the date the return was actually due, 2 years from the filing date, and 240 days from assessment.
  • There can’t be fraud. If the return had fraudulent information in it, or lack of information, the IRS will argue after the fact that the debt wasn’t discharged.
  • There can’t be “willful evasion”. Hiding assets or spending money on a nice lifestyle instead of tax debt..may trigger this argument by the IRS as well.

EXCEPTIONS TO DATE RULES

Certain actions “toll” or suspend these time periods,

As a result, an ill-timed bankruptcy filing may not discharge the tax debt you thought it would.

These tolling events can be tricky to calculate and some of them aren’t “settled” law.  Get help from someone who understands this area of law.

OTHER BANKRUPTCY BENEFITS

BANKRUPTCY STOPS IRS COLLECTION AND FEDERAL TAX LIEN NOTICE FILINGS

If the IRS is trying to grab money or other assets, the bankruptcy filing stops it using the Automatic Stay under 11 U.S.C Sect. 362.  The IRS can’t take your wages, money in your accounts, start new collection actions or file a lien notice once the case is filed.

We like bankruptcy for this reason alone.  It’s a powerful way to put a stop to difficult collection problems and one that takes the decision making ability away from the IRS itself.

If you are filing the bankruptcy primarily for reasons unrelated to tax debt, this pause allows you to work out how you are going to deal with tax debt that will survive the case.  The IRS can’t start collection again until discharged is entered in a chapter 7, which usually occurs about 3-4 months after filing.

In a Chapter 13 bankruptcy, the automatic stay applies as well, but the tax debt is either paid off via your plan payments, treated as dischargeable at the end of the case and wiped away, or the debt survives the case if it is non-priority, unsecured, and non-dischargeable.

REMOVING AN EXISTING IRS LIEN USING BANKRUPTCY

If a chapter 13 bankruptcy is used, the lien filed prior to the bankruptcy is valued on the date of the bankruptcy filing and paid with some interest over the length of the plan.  If the value of the lien is less than the total tax debt and the total tax debt is treated as dischargeable, than you may end up paying just a fraction of the debt in the plan, and getting rid of the remaining tax debt and the lien at the plan’s conclusion.

Chapter 7 bankruptcy doesn’t remove an IRS lien, but it can reduce the value of the lien to the net value of your assets.  Unlike in a chapter 13 bankruptcy however, if the value of the asset increases after the chapter 7 filing and the lien is greater than the value (a good example is your home and it’s equity)…the lien value will increase post filing.

Any assets that you buy or inherit post chapter 7 bankruptcy, won’t be subject to the IRS lien if the underlying tax debt is discharged.

The IRS will often agree to release it’s lien on the discharged debt after a chapter 7 bankruptcy if the assets are minimal or you offer some smaller amount to settle the lien.

IS BANKRUPTCY BETTER THAN DEALING WITH THE IRS DIRECTLY?

It can be.  The answer to the question depends on all sorts of factors.  Income, budget, assets, whether the IRS debt is dischargeable, IRS liens, other debt issues etc.

Most people don’t qualify for an IRS offer in compromise and many have a difficult time in a payment plan because the IRS hasn’t taken into account the full budget and other debt in determining ability to pay.

GET SOME HELP

If you have IRS debt, other debts like credit cards, medical bills, large car payments, or house arrears, it will be worth at least discussing whether bankruptcy might help. We’ve helped several hundred clients over more than 2 decades with serious tax debt use bankruptcy to make their situations better. Make an appointment and we can discuss whether bankruptcy might help you.

17 situations when the IRS won’t collect

taxes-man-being-shakenTax Debt left unattended will result in IRS collection activity…levies, liens and property seizures.

IRS collection activity just doesn’t stop on it’s own. It will happen after the tax debt has been:

a.  Assessed  (entered into the books as a debt)

b.  You have been sent a notice of the debt and demand for payment and you don’t pay. AND:

c.  You received a “final notice of the IRS intent to levy and a right to a hearing” at least 30 days before the levy actually occurs and to your last known address.

But even if you have a tax debt and are concerned about losing most of your paycheck, there are a number of situations in which the IRS collection activity can’t or won’t occur:

1. INSTALLMENT AGREEMENT IN EFFECT

If you have negotiated a formal payment plan (or non collectible status) with the IRS and you have been making timely payments, the IRS cannot collect.

2. 30 DAYS AFTER TERMINATION OF INSTALLMENT AGREEMENT

If the Installment Agreement is terminated for any reason, the IRS cannot collect for a 30 day period after it issues you it’s termination notice.

3. DURING APPEAL FILED WITHIN 30 DAYS OF INSTALLMENT AGREEMENT TERMINATION

If the Installment Agreement is terminated, and the IRS has provided you a 30 day notice AND you file a proper appeal within that 30 day period, the IRS can’t collect until the appeal is heard.

4. OFFER IN COMPROMISE IS PENDING

The IRS won’t collect while an properly filed Offer in Compromise is being considered.

5. DURING APPEAL OF REJECTED OFFER IN COMPROMISE

You have the right to appeal the rejected Offer in Compromise internally with the IRS. The IRS won’t collect during that period and until the hearing is complete.

6. DEBT ASSESSED BUT FINAL NOTICE OF INTENT TO LEVY HASN’T BEEN ISSUED

The IRS can’t collect until 30 days after it sends a “Final Notice of Intent to Levy” to your last known address.

7. DURING COLLECTION DUE PROCESS APPEAL FILED AS A RESULT OF RECEIVING THE FINAL NOTICE OF INTENT TO LEVY

The “Final Notice of Intent to Levy” provides the right to file an appeal. That appeal is called a “Collection Due Process Appeal”. If filed properly and you can prove the IRS received it, the IRS cannot collect until the hearing has been completed.

8. DURING A BANKRUPTCY PROCEEDING

Section 362 of the Bankruptcy Code creates an “automatic stay” that stops all creditors…yes even the IRS from collection activity. (Bankruptcy is helpful in other ways as well. It can even eliminate certain tax debt)

9. AFTER THE STATUTORY DEADLINE ON COLLECTION HAS RUN OUT

The IRS has a certain amount of time to collect a debt. 10 years to be precise, from the date the debt is assessed. Once that happens, the debt doesn’t exist. (Calculating the 10 year period isn’t always as easy as it seems)

10. NOT ENOUGH EQUITY IN AN ASSET

When the IRS is trying to grab an asset it must make sure that the asset has value above what is owed the bank on it. i.e. there must be “sufficient net proceeds” from the sale to apply some money to the debt. If you vacation home is worth $100,000.00 and you owe the bank $120,000.00, there is not equity and therefore no IRS collection.

11. IRS CONSIDERING THE SIEZURE OF YOUR PERSONAL RESIDENCE

The IRS won’t just slap locks on the door of your home. It must first file a case in the US District Court asking for formal approval. This is a relatively rare procedure.

12. IRS CAN’T SIEZE CERTAIN PERSONAL ASSETS

The IRS is barred from taking household goods and furniture worth up to $7900.00. It also can’t take child support, unemployment checks or clothing.

13. BUSINESS ASSETS OF AN INDIVIDUAL

The IRS won’t take your business assets if you have other assets that will pay the debt. Even if you don’t and it tries to take your business assets it must obtain approval from an IRS Area Director.

14. INNOCENT SPOUSE CLAIM

The IRS will stop collection when an Innocent Spouse Claim is properly filed and appealed.

15. DEBT IS INCORRECT

If you can provide some proof to the IRS Collection personnel that the debt is probably incorrect, it is supposed to slow down the collections process until the debt issue can be resolved (IRS Policy Statement 5-16)

16. IRS SUMMONS

If the IRS has issued a Summons, collection activity can’t occur on the date you appear to meet with the collection personnel.

17. HARDSHIP

The IRS will suspend collection activity if you can prove that the collection result will create a real hardship i.e. power will be turned off, kicked out of apartment, inability to eat etc. This suspension is only temporary if you can’t than provide additional required documentation within a certain time-frame.

10 Bankruptcy FAQ

images (6)1. BANKRUPTCY – WHAT IS IT?

Bankruptcy is a process that takes place in Federal Court. The Bankruptcy Code governs the process and it is designed to provide debt and other relief to consumers and small businesses. Most consumers and small business people file a bankruptcy as a “liquidation” case called a Chapter 7, and some consumers and small business people file a “Reorganization” bankruptcy or Chapter 13.  Very few Consumers or Small Business People file a Chapter 11 Bankruptcy, which is typically used for Corporate Reorganization of Debt.

In a Chapter 7 Bankruptcy you are asking the Court to wipe away as many debts as can be wiped out according to Bankruptcy Code. In a Chapter 13 Bankruptcy you are asking the Court to reorganize your financial life, pay some debts, wipe away others, primarily based on what you can afford and what types of debt you have.When you file a bankruptcy a Court Order automatically goes into affect. This is called the Automatic Stay and it stops most creditors from collecting during the case.

Certain types of debt survive a chapter 7 bankruptcy like child support, spousal maintenance, certain tax debt, most student loan debt and debts incurred fraudulently.

2. HOW DO I KNOW WHICH CHAPTER, CHAPTER 7 OR CHAPTER 13 I SHOULD FILE?

When you file a chapter 7 bankruptcy you are asking the Bankruptcy Court to sever your obligation to pay most of your debt. In exchange for that “discharge” of debt you have to give the Bankruptcy Trustee your assets or at least those that aren’t protected by various asset exemption laws in Arizona. The Trustee will take those non-exempt assets and divide them amongst your creditors.

A Chapter 13 Bankruptcy is not a liquidation case like a chapter 7 case. You don’t have to give up any assets. You do have to pay your creditors on a monthly basis a certain amount of money. The amount of money you pay your creditors depends on several factors. The most important are

a.  Your income levy in the past and in the future.

b.  Your budget

c.  The amount of priority debt i.e. debt the bankruptcy code considers so important that it can’t be “discharged” and it must be paid in a chapter 13 in full.

d. The amount of secured debts you have like car loans

e.  The value of your non-exempt assets: Again, those assets that aren’t protected by the Arizona Exemption Statutes.

With a good breakdown of the above information we can determine how large your plan payment will be in a chapter 13 case, whether that amount will protect your non exempt assets, and how much of your non priority debt will be wiped away after the case is over.

If you qualify to file a chapter 7 bankruptcy there are a number of reasons why you may choose to file a chapter 13 bankruptcy anyway: Some of the more common are:

a.  You have assets that are not exempt that would be lost in a chapter 7 filing and that you consider important enough to keep that you are willing to pay their value to your creditors in a chapter 13 case.

b.  You are about to lose your home to foreclosure and have no other way to bring it current. A chapter 13 case will allow you to spread the amount you are behind over 3-5 years and stop the foreclosure.

c.  You have a car that is worth much less than you owe on it and/or that is about to be repossessed. The chapter 13 will stop the repossession and allow you to pay the market value of the car over 3-5 years at a reduced interest rate (in most cases) if you purchased the car more than 2.5 years ago.

d.  You have non-support related debt obligations as a result of a divorce decree. These obligations are dischargeable in a chapter 7 but are in a chapter 13 Bankruptcy.

e.  You feel the need to pay something back to your creditors and have a steady income.

3. SO I CAN JUST CHOOSE WHICH TYPE OF BANKRUPTCY TO FILE?

If you qualify to file both a chapter 7 Bankruptcy and a chapter 13 Bankruptcy than you can choose which one better suits your needs.

There are a number of ways a person doesn’t “qualify” to file a chapter 7 Bankruptcy or a chapter 13 Bankruptcy, but it is important to understand that even if you qualify for either, the choice you make could be a difficult one. An experienced Arizona Bankruptcy Attorney can help to make sure all of the issues are considered before making such an important decision.

4. WHEN AM I INELIGIBLE TO FILE A CHAPTER 7 OR A CHAPTER 13 BANKRUPTCY?

The most common situations that prevent a person from qualifying to file a chapter 7 Bankruptcy are:

a.  Failed Means Test – Bankruptcy Law requires that each filer is “means tested”. In order to pass the test your disposable income after subtracting certain expenses and debt payments must result in less than a specific amount payable to your creditors over 5 years. This test can be complex in some cases and planning is often involved. If you fail it, you can’t file a chapter 7 bankruptcy UNLESS the majority of your debt is business or tax related.

b.  Filed a Previous Bankruptcy – If you filed a chapter 7 bankruptcy within the last 8 years and received a Discharge you can’t file another. If you filed a Chapter 13 within the last 6 years and received a Discharge you can’t file a Chapter 7 Bankruptcy.

c.  Dismissal – If your Bankruptcy case was dismissed within the last 180 days in certain circumstances.

d.  Fraud – You defrauded your Creditors

The most common situations that prevent a person from qualifying to file a Chapter 13 Bankruptcy are:

a.  Filed a Previous Bankruptcy – If you filed a chapter 7 Bankruptcy and received a discharge within the last 4 years you are ineligible to file a chapter 13 Bankruptcy and receive a discharge.

b.  Too Much Debt – Chapter 13 bankruptcy is limited to those who have less than $1,184,200.00 in secured debt and unsecured debt of $394,725.00.

c.  Business – Business Entities can’t file a chapter 13 Bankruptcy.  (Self employed individuals can)

d. Disposable Income – You must have income that is high enough to pay your basic living expenses and a payment to the Bankruptcy Trustee that will pay car loans, mortgage arrears, priority debt, fees, value of non-exempt assets, and an amount to unsecured creditors required by the means test.

e.  Haven’t Filed Tax Returns – You must file at least the last 4 years and continue to file during the case.

5. WHAT CAN BANKRUPTCY DO FOR ME?

Bankruptcy can do a number of things for you if you are having serious debt problems. The most common are:

a.  Eliminate your obligation to pay most of your debt.

b.  Eliminate the obligation to pay tax on the eliminated debt as you may have to if it were forgiven outside of bankruptcy

c.  Stop a foreclosure on a home and allow you to pay the arrears over time

d.  Stop the repossession of your car and even force the return of it in certain circumstances.

e.  Stop wage garnishment, debt collection calls.

f.  Restore or prevent termination of utility service.

g.  Allow you to challenge creditor claims

h.  Allow you to pay less per month on your debt obligation than you may have had to pay the IRS directly.

6. BANKRUPTCY CAN DISCHARGE DEBT, SAVE MY HOME FROM FORECLOSURE, PROTECT CERTAIN ASSETS AND SOME OTHER GREAT THINGS, BUT, WHAT CAN’T IT DO

a.  It can’t eliminate certain debt obligations

Certain debt obligations aren’t discharged in Bankruptcy.  The most common are: Child Support/Spousal Maintenance, Property Settlement Debt related to divorce (chapter 7 only), Certain taxes, Most student loan debt, debt you forget to list (there are exceptions in a chapter 7 bankruptcy), debts related to drunk driving or criminal activity and fraudulently incurred debt

b.  It can’t prevent a creditor whose debt is secured with property from taking the property.  Bankruptcy can eliminate the obligation to pay the debt, but it doesn’t eliminate most liens. So if you don’t continue to pay for your car, you won’t be obligated to pay for it but the bank can take it.

c.  It can’t protect co-signers.  When a relative or friend has co-signed a loan, and you discharge the loan obligation in your bankruptcy, the co-signer may still be on the hook. (This may not be true in Arizona re: your spouse)

d.  Discharge debts that you incur after Bankruptcy

7. CAN BANKRUPTCY ELIMINATE MY TAX OBLIGATION?

The most common type of tax debt obligation eliminated in bankruptcy is income tax. There are some basic requirements for this type of debt obligation to be eliminated in Bankruptcy.

a.  The Tax Return must have been due more than three years before you file the bankruptcy.

b.  The Tax Return must have been filed by you more than two years before you file the bankruptcy

c.  The Tax Debt must have been assessed by the IRS more than 240 day before you file the bankruptcy case

d.  You cannot have filed a fraudulent tax return or otherwise willfully tried to evade paying tax.

We have helped hundreds of clients discharge millions of dollars in income tax debt using bankruptcy and the rules although simple on their face can get confusing and an experienced tax and bankruptcy attorney is often necessary to sort them out.

There are other benefits that bankruptcy can provide in relation to tax debt as well like:

a.  A chapter 7 bankruptcy will discharge the obligation on most income tax penalties and interest on the penalty older than 3 years

b.  A chapter 13 bankruptcy will allow you to treat most income tax penalty and interest on the penalty as dischargeable debt no matter how old the tax debt is

c.  The non trust fund portion of employment tax if owed by the individual business owner is dischargeable in bankruptcy if it meets the date requirements.

d.  Arizona Sales Tax (Transaction Privilege Tax) is dischargeable in bankruptcy if it meets the date requirements, as it is not a trust fund tax.

8. WILL BANKRUPTCY ALLOW ME TO GET RID OF MY SECOND MORTGAGE?

In Arizona, a Bankruptcy can be used to “get rid” of your obligation on the second mortgage if:

a.  The home is worth less than the 1st mortgage is owed making the second mortgage fully unsecured

b.  You file a chapter 13 Bankruptcy and follow the local rules in filing certain documents and following certain procedures

c.  You complete the chapter 13 Bankruptcy and obtain a discharge.

9. CAN I FILE THE BANKRUPTCY WITHOUT MY SPOUSE?

In Arizona you may be entitled to what is called a “community discharge” of your debt. This means that even if your spouse doesn’t file with you he or she may protect community assets and income from creditors as long as you are married.

10. HOW WILL BANKRUPTCY AFFECT MY CREDIT?

The affect on your credit score as a result of bankruptcy is difficult to determine. Generally, if you have bad credit now and bankruptcy will wipe out the obligation on a number of debts listed on your credit report, your credit should improve. Bankruptcy should be considered a last resort and if the decision between filing and not filing is being made based solely on the effect the bankruptcy will have on the credit report, you may not be a good bankruptcy candidate.

10 Bankruptcy Misunderstandings

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1. YOU WILL LOSE YOUR HOME

In Arizona, a person or married couple is allowed to protect the first $150,000.00 equity in their personal residence from creditors. This rule applies in bankruptcy as well.For example, if you own a home, you live in it, and it is worth $200,000.00 and your only mortgage is $50,000.00, you have $150,000.00 in equity. That equity is safe.

What if you don’t make your mortgage payment? That’s a different story.

2. TAXES CAN’T BE DISCHARGED IN BANKRUPTCY

Income tax debt is dischargeable in bankruptcy if it meets certain criteria.  It is the most common type of tax debt dealt with in bankruptcy. Certain other tax debts are as well like:

a.  The non-trust fund portion of the self employed payroll tax. If you own a small business and run it as a sole proprietor using your social security  number and you have employees… you must withhold their income taxes, their portion of social security and medicare taxes, and you must  match a certain portion of that payroll tax and send it all in. (6.2% social security tax and 1.45% medicare tax) If you don’t, you will owe the  entire amount. The employee portion is trust fund i.e. it is never dischargeable in bankruptcy, but the employer portion may be dischargeable in  bankruptcy if:

–  More than 3 years between the date the 941 return was due and the date the bankruptcy is filed

–  More than two years have elapsed between the date the returns were filed and the bankruptcy filing and;

–  No willful evasion of the obligation to pay the tax occurred.

b.  Arizona Transaction Privilege Tax: The Arizona Transaction Privilege Tax is a sales tax but it isn’t collected from the customer. It is tax on the privilege of doing business paid based on a percentage of sales. It is not trust fund. If it meets criteria similar to the criteria mentioned above under Non Trust Portion of Payroll Tax, it may also be discharged in Bankruptcy.

c.  Tax Penalty: The IRS hits you with all kinds of penalties related to income tax. The most common are failure to file a tax return on time and failure to pay the debt. These two penalties really add up and with interest can actually double the debt over time.  In a chapter 7 bankruptcy these two common penalties are dischargeable if they meet the three basic date rules.

–  3 years between due date of return and filing date of bankruptcy

–  2 years between actual filing date and filing date of bankruptcy

–  240 days between assessment date and bankruptcy filing date

What if the underlying debt didn’t meet one of these rules? The debt and the penalty would survive the bankruptcy. In a chapter 13 bankruptcy, the penalty and the interest on the penalty is treated as non priority dischargeable debt no matter it’s age.

3. YOU GET TO CHOOSE WHICH CREDITORS TO “INCLUDE”

This is a very common misconception and a dangerous one. The failure to list a creditor in the bankruptcy schedules is a serious matter. One purpose of the bankruptcy code is to treat all similarly situated creditors alike. When you leave one out and pay it, the others are getting shortchanged. When you file bankruptcy make sure and tell the attorney every debt you have.

4. AN AGREEMENT THAT SAYS THE DEBT IS NON DISCHARGEABLE MAKES THE DEBT NON DISCHARGEABLE

For the most part these types of clauses in contracts are not enforceable and are just a tactic used by creditors to scare them away from bankruptcy.

The bankruptcy filing severs obligations with most creditors. It severs the obligation that was the original result of the contract you signed that contained the non-discharge language.

5. YOU CAN LOSE YOUR JOB IF YOU FILE FOR BANKRUPTCY

There is a law for most everything and there is a law for this as well. That law says that if you can prove that the employer fired you because you filed for bankruptcy, the employee can sue the employer. However, if you are looking for a job, that new potential employer may be able to use the bankruptcy filing as a factor in deciding whether to hire you.

6. YOU HAVE TO BE REALLY BROKE TO FILE FOR BANKRUPTCY

The bankruptcy code doesn’t have a “really, really broke” provision. It does allow you to protect certain assets so that you have a place to live, a chair to sit on, a car to drive and some retirement money. It does this so that you don’t file for bankruptcy and than become a “ward” of the state. In Arizona the most common assets that are safe from the Bankruptcy Trustee and most of your creditors outside of Bankruptcy are:

  • Home – Equity to 150,000.00
  • Tax Qualified Retirement Accounts
  • Certain Whole Life Insurance Policy Cash Value Amounts
  • 1 Car per person up to $6000.00 in equity
  • Most household Furniture
  • Clothing, Wedding Rings, Gun
  • Six Months of Food Fuel and Provisions

Also, many people file for bankruptcy and have steady and “good” incomes. If the majority of all your debt is tax or business debt, it may not matter what you earn, you may still qualify to file a chapter 7 bankruptcy.

7. YOUR EMPLOYER WILL BE NOTIFIED WHEN YOU FILE FOR BANKRUPTCY

Filing for Bankruptcy doesn’t carry with it the requirement that you notify your employer. Bankruptcy filings are placed in the public record, most employers don’t go searching the public bankruptcy record on a regular basis.

8. MY CREDIT WILL BE TERRIBLE FOR TEN YEARS

Most bankruptcy filers see some improvement after a relatively short period of time 1 to 2 years, especially if they apply some effort after the case is over to rebuild the credit score. We take the position that if the deciding factor in choosing to file bankruptcy is just your credit score hit, you really should re-think the decision to file anyway. Your situation may not be serious enough to warrant using bankruptcy.

9. I CAN JUST SELL THE MY BOAT, HOUSE, FANCY CAR TO MY COUSIN FOR 1 DOLLAR AND PROTECT IT FROM BEING LOST TO THE BANKRUPTCY TRUSTEE

Any transfer for less than market value made within 2 years prior to the bankruptcy case has to be disclosed to the court. It is considered fraud for bankruptcy purposes and can be reversed. It can also end up causing your to lose your bankruptcy discharge. There are other ways to deal with non-exempt assets that may be more beneficial.

10. I HAVE TO FILE BANKRUPTCY WITH MY SPOUSE

You may be able to file alone and in Arizona still give your marital community the benefit of the bankruptcy discharge i.e. protection from creditors. It is called the community discharge and you will need to talk to an experienced bankruptcy lawyer about it.

Tax Debt? You Have Options

little-boy-following-recipe-as-bakes-cake-reading-list-ingredients-to-be-added-to-eggs-his-mixing-bowl-42387048Tax Debt?  You Have Options

The following is a list of the most common legal ways to deal with large IRS tax debt. Some are obvious, some are difficult and require extensive planning and some only work best in combination with another option.

Despite the fact that a review of the list alone won’t solve the problem, it should provide you some additional knowledge about existing options and some hope that there may be a solution.

Here they are:

Pay the Debt

If the funds exist to pay the debt in full, it often makes sense to do so, paying the debt off at once or in a few payments, stops liens, levies and interest. Borrowing to pay it off at once or in a few payments, stops liens, levies and will often reduce interest.

However, if you are considering the use of retirement funds or home equity to pay the debt off or to borrow against in order to do so, some additional thought may be in order.

Use the Statute of Limitations to Your Advantage

Congress decided at some point, that it would make sense to limit the time the IRS has to figure out how to get paid. It does things right once in a while.

26 U.S.C Section 6502 provides the limit and as a result, the IRS has ten years to get it done.

This seems like a long time, but you would be surprised at how many people with serious tax debt are able to use this law to their advantage. In fact, the wise use of the Installment Agreement/Non-Collectible Status option combined with the statute is what I often call the “poor man’s”  offer in compromise. (see below for more about installment agreements and offers in compromise)

An example:

Imagine a tax debt of $100,000.00. Imagine that the IRS has let 7 years pass without attempting to collect the debt, but they are now at the doorstep. The debt has grown to $300,000.00 with penalty and interest over time, but the taxpayer can only afford to pay $100.00 per month toward the balance. If the taxpayer were able to negotiate such a payment, only $3600.00 of the $300,000.00 would be paid before the debt disappeared.

Filing an offer in compromise, bankruptcy or pursuing some other legal remedy in an attempt to slow down the collection, would stop the statute from running. So some serious thought would be required before doing so.

There are other statutes that limit time periods in which the IRS may act:

  1. Assessment: The IRS has only three years to assess a tax from the date a return is filed in most circumstances.
  2. Liens: Liens have the same 10-year statute as debt collection. I.e. if the IRS has not reduced the debt to judgment, the lien is no good once the statute on collection runs out.
  3. Payroll Tax Assessment: Only three years again to assess payroll tax withholding amounts from the date of the filing of the return or the date the return was due whichever later.
  4. Trust Fund Recovery Penalty Assessment: The IRS has three years to assess personal responsibility for corporate payroll withholding amounts from the filing of the applicable return.

Challenge the Tax Debt

The IRS screwed up. They assessed a debt against you that you know isn’t correct. Typically, this is the result of an audit gone bad or the creation of a tax return by the IRS, because you didn’t file it yourself. They don’t use correct deductions when they do that by the way.

IRS Audits that go badly can be appealed. If done right, they can be appealed all the way to tax court and beyond. If your audit result is wrong, you have a limited amount of time to bring the appeal, so call someone now.

Tax returns filed by the IRS come with appeal rights as well. Most people don’t respond in time and lose them, however. Thankfully, the assessment of the tax from the incorrect return can be challenged using the IRS audit reconsideration  process.

In English…you can file the correct return and use it to try and replace the incorrect return.

The ability to do this isn’t guaranteed and doesn’t come with appeal rights. Also, failing to file your own return before the IRS files a return can cause another big problem. Namely, the potential inability to discharge the debt in bankruptcy if necessary.

There are other things the IRS does to assess a tax that can result in incorrect debt amounts, like the assessment of the trust fund recovery penalty against a responsible  party.

Where the business has withheld the employee portion of the payroll tax, but used the money for advertising and rent payments instead of sending it in, the IRS can add the amount up and stick it as a penalty on the individual person who they consider to have been responsible for the diversion of the money.

There are defenses to this, however, and the assessment of the debt can be challenged as a result.

Sometimes the tax is correct but it just isn’t fair that the spouse should be stuck with it. The law provides the ability to challenge the debt based on some theories about innocent spouses.

Installment Agreement

26 U.S.C. Section 6159 allows the taxpayer under various and specific circumstances to pay the debt over time. These types of agreements are commonly called installment  agreements or plans.

There are various types of IRS installment agreements including:

  1. A guaranteed 3 year plan if the debt is less than $10,000.00
  2. A streamlined plan for debts less than $100,000.00/$50,000.00/$25,000.00 that is typically paid over 6 to 7 years and doesn’t require the submission of detailed financial information.
  3. A full pay plan that allows the taxpayer to use his or her actual/reasonable budget to determine ability to pay if the debt is paid over 6 years and;
  4. A partial pay installment agreement.

The partial pay plan allows the taxpayer to pay only what he or she can afford each month even if the amount paid doesn’t pay the debt in full before the statute of limitations runs out on the collection of the debt. Again, a “poor man’s” offer in compromise. (see above)

Installment agreements stop levies as well, but they don’t necessarily prevent the recording of the notice of federal tax lien (unless the debt is less than $50,000 and the payment plan is set up in a certain way) or stop the assessment of penalties or accrual of interest. They also don’t prevent the IRS from demanding the use of assets to pay down the debt.

Offer in Compromise

26 U.S.C Section 7122 provides the basis for the settlement or one-time reduction of the tax debt. In essence, you would be making an offer to compromise and settle the back tax liability. But this isn’t horse-trading.

The amount that the law requires the IRS to settle for is based on objective criteria. This criterion is called the “reasonable collection potential” or the RCP.

In theory, the RCP is the amount that the IRS could collect from you before the statute of limitations period on collection runs out.

The vast majority of offers filed with the IRS fail primarily because the RCP calculation is rigged a bit in the IRS’ favor. They are allowed to use as a starting point for calculation purposes or a budget that is based on averages they have created.

For instance, they may have pre-determined that a family of four only needs $1650.00 per month to pay for all housing and utilities expenses. That family may be actually spending $2100.00 per month. If in the end, the IRS is able to use the $1650.00 figure to determine the RCP, then the amount of extra income per month by their calculation would be at least $450.00 per month.

If the statute of limitations period remaining on collections is 8 years than the RCP, just based on this number could be as high as $43,200.00

Successful Offers in Compromise, require much thought and planning as a result. They shouldn’t be entered into lightly.

There are two other types of Offers. One is used to dispute the underlying debt typically called an Offer in Compromise based on a doubt as to the liability. The other is made when the taxpayer may be able to afford the tax debt payment but it would be unfair to make him or her do so.

Some side notes about the Offer Process:

a. It stops IRS levy and other seizures.

b. The taxpayer is on probation for 5 years following the acceptance of the Offer. He or she must file all returns timely and pay all the tax due or else the offer is revoked.

Currently Non-Collectible Status

If the IRS is levying or otherwise, and the collection is causing an actual hardship on the taxpayer, the collection activity is supposed to stop. If the taxpayer can convince the IRS of the hardship status, a code can be placed on the account to designate the account as non-collectible.

The main benefit is obvious. There is a secondary benefit that is less obvious and that is that the statute of limitations period on collections continues to run while the status is in place.

The downsides of non-collectible status are that interest continues to accrue and if the change in circumstance is to the taxpayer’s benefit, i.e. income goes up, the status can be revoked.

Innocent Spouse

If you filed a return jointly with your spouse or ex-spouse, and a large tax debt exists as a result, you need to be at least aware of your potential rights as an innocent spouse.

There are three types of relief:

a. Innocent Spouse Relief “ Where your spouse or former spouse filed to report income correctly or claimed improper credits or deductions.

b. Separation of Liability “ The additional tax that exists as a result of the spouse or ex-spouse’s decision to not report something properly on the return may be allocated to that spouse.

c. Equitable Relief “ If you do not qualify under one of the theories above, the IRS may agree to relieve you of the debt based on fairness and equity.

The basic requirements to file for innocent spouse relief are these:

a. The taxpayer filed a joint return which has an understatement of tax due to erroneous items.

b. The taxpayer can establish that at the time he or she signed the return he or she did not know and had no reason to know that there was an understatement of the tax.

c. Taking into account all of the facts and circumstances, it would be unfair to hold the taxpayer liable for the understatement of the tax.

Collection Due Process

When a tax debt is assessed or entered into the government’s records as a debt, the IRS doesn’t need a Judge’s permission to collect. They can simply start the collection process. However, there are some limits on this ability. The most important are that you are entitled to due process . Therefore, the IRS must send you a notice of it’s intent to levy and give you thirty days to appeal it and ask for some alternate arrangement.

This appeal  is called a collection due process appeal and using it stops the collection process. Although the statute of limitations on collections stops running while the appeal is pending, the appeal typically provides the taxpayer the time to find a solution to the tax debt.

An offer in compromise can be made via this process and judicial review attaches to the process as well.

Collection Appeals Process (CAP)

Collection activities can be appealed  at any time. These types of appeals have different names like equivalency  hearing, and can in less powerful ways forestall the collection process. They do not come with the right to seek judicial review.

Bankruptcy

Bankruptcy and it’s relation to tax debt is misunderstood. Many people including attorneys believe that bankruptcy can’t resolve tax debt. Nothing could be further from the truth.

In fact, unless the IRS is able to prove that a taxpayer attempted to evade a tax or filed a false return, the treatment of the tax debt is not up to them. It is governed by the Bankruptcy Code.

Filing a bankruptcy petition will stop all tax collection activity by the IRS and erase taxes that meet the Bankruptcy Code’s definition of dischargeability.

I have helped many taxpayers rid themselves of tax and other debt through bankruptcy especially where one of the other solutions in this article didn’t make complete sense.

Pay and Sue for Refund

The U.S. District Court and the Court of Federal Claims hear tax cases only after the taxpayer has paid the tax (or a portion of it in district court) and filed a claim for a refund.

A taxpayer can file a claim for a refund if he or she believes that the tax paid was incorrect. Once the claim is disallowed by the IRS, the taxpayer can bring the suit.

The suit must be brought within a certain time period after the rejection of the claim.

Penalty Abatement

As a taxpayer, you have the right to request the cancellation of any IRS penalty. There are more than 140 penalty provisions and they all have a good faith  exception.

If you have been penalized for something like a failure to pay the tax on time, but you acted in good faith and there exists some reasonable  basis for the failure then the penalty can be removed along with interest. This removal often makes it easier for you to deal with the underlying debt.

Debt Collection Protection Using Chapter 13 Bankruptcy Co-Debtor Stay

In most bankruptcy cases, a powerful tool called the “automatic stay” comes into existence the moment the case is filed. This “stay” prevents almost every type of debt collection from continuing.  A home foreclosure, car repossession, and garnishments all end by operation of law.  The automatic stay applies to the “debtor” or “debtors” who actually file the bankruptcy case.

But sometimes the debtor filing the bankruptcy has a co-debtor (someone who owes the debt jointly) who can’t or won’t file bankruptcy.  In those cases, the question becomes whether the automatic stay will stop debt collection activity for them as well.  In certain situations, it will via the “co-debtor stay”.

The Co-Debtor Stay and How it Works

Imagine a husband and wife who have jointly financed the purchase of some nice furniture for the family room.  They are both on the hook to pay the loan for the furniture either or both of them sign the loan documents.  (Arizona is a community state so what binds one spouse binds the other).

The couple later has financial problems and the wife decides to use chapter 13 bankruptcy to deal with the debt.  The husband doesn’t file the case with her. The wife is protected by the bankruptcy filing’s automatic stay…but is the husband as well?  Can the bank that lent the money on the furniture sue the non-filing husband who is outside the bankruptcy case?  No, the creditor can’t sue the Husband.

In a chapter 13 case, automatic stay applies twice.  Once for the filer of the case and once to the co-debtor on a specific debt.

Even though we used a husband and wife example, the co-debtor stay applies to non-spouses as well in a chapter 13 bankruptcy.  It will protect anyone jointly responsible.

The Co-Debtor Stay has Some Limits

Not in Chapter 7 Bankruptcy

The first limitation on the co-debtor stay is that it never applies in a chapter 7 case.  Some people use chapter 13 bankruptcy just for the purpose of protecting a co-debtor even when chapter 7 makes more sense for other reasons.

Only Consumer Debt

The second limitation is that the co-debtor stay only applies to consumer debts.  A consumer debt according to the bankruptcy code is a debt incurred primarily for a personal, family or household benefit.  The co-debtor stay doesn’t apply to tax or business related debt.

Court Ruling

Under section 1301(c) of the bankruptcy code the Bankruptcy Judge can lift the co-debtor stay and allow the creditor to continue collection if the creditor files a motion and one of three circumstances are true.  First, if the co-debtor was the party that actually received the benefit of the loan as opposed the bankruptcy filer.  Second, if the chapter 13 filer’s plan doesn’t propose 100% payment on the creditor’s claim.  Third,  if the creditor would be irreparably harmed by the co-debtor stay.

Once a motion to lift or remove the co-debtor stay is filed, a hearing is held.  If the creditor is alleging that 100% of the debt won’t be paid, the stay is lifted automatically after 20 days if no objection is filed by the debtor or co-debtor.