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.

Income Producing Assets in an IRS Offer in Compromise

imagesIf you own a business and that business has value, many people would assume that it should be included as an asset in calculating the amount of settlement.  As a result, many offers are calculated much higher than they should be.

Income producing assets in an IRS Offer in Compromise shouldn’t always be fully included in the calculation of “reasonable collection potential”.

When an Offer in Compromise is submitted to the IRS and that taxpayer owns business assets that produce income, it’s correct to adjust the income or the expense calculation to account for any loss of income if the asset were liquidated or used as collateral to secure a loan for purposes of funding the offer.

This analysis may even include a rental property.

The Internal Revenue Code defines rental property as a real estate trade or business.  Rental property is important to the production of income where it is actually being rented.  If the IRS were to treat the equity in the rental property as an asset for Offer in Compromise calculation purposes, it would then need to reduce the income from that rental property as well.

The reason so many people get this calculation incorrect is because the IRS forms 433A and 656 don’t specifically ask if any business assets are essential to the production of income.  Most offer in compromise “filers” simply add both the asset value and the income stream from the asset to the disclosures in 433A and to the calculation in the 656 form as a result.

When they do this, the IRS gladly accepts.  It won’t catch the mistake and fix it.  It definitely won’t make the argument for the taxpayer either.

If you own rental property or a business and have significant tax debt, keep in mind that the Offer in Compromise must take the above into account. The documents should contain and the argument must be made that either the equity should be excluded or the stream of income should be excluded from the income producing business asset when calculating a settlement amount in an Offer in Compromise.

 

 

 

 

 

 

 

 

 

 

Why did the IRS terminate my installment plan?

images-thumb-375x534-61823Just because you are in an IRS Installment Plan with the IRS doesn’t mean that your work is done.  One of the common questions I get is “why did the IRS terminate my installment plan?”.

The following are the most common reasons why this happens.

Your Income Changed

When you file a tax return the IRS reviews it to determine whether you income has changed i.e. increase.  If they see this and you are in a partial pay installment plan or a plan based on your income and budget, they will send you a letter indicating that the plan will end unless you provide updated financial information.  Unless your payment plan is guaranteed or streamlined, the IRS will request new financials when it sees the increase in income.

You Didn’t File a Return

Installment plans are contingent on compliance.  If you late file a future tax return….it will send you a notice of intent to terminate your agreement and send you back to collection.  You will have to file any missing returns, and negotiate a new plan.

You Didn’t Pay a Future Debt

If you file a subsequent return on time and it has a balance due but you don’t pay it, the IRS will do the same thing as if you didn’t file the return on time.  It will send a notice terminating the agreement and force you to re-supply your financials.

You are in a Partial Pay Installment Agreement

Many people with tax debt are either in non-collectible status arrangement or they are in a partial payment installment agreement with the IRS.  In a partial payment agreement, you aren’t paying enough to the IRS to pay the debt owed before the 10 year clock on collection runs out.  (IRS Statute of Limitations on Collection)  This type of arrangement is allowed but the law requires that the IRS review the arrangement every two years.

An Example

You owe the IRS $75,000, and have convinced them to accept $100.00 per month toward it.  The Statute of Limitations period has 4 years or 48 months remaining to collect the debt of the 10 year total time-frame it has to do so.  6 years have elapsed.  2 years into that 4 year remaining period, the IRS should send you a letter asking you to supply updated financial information.

Late Payment

If you make a late payment, the IRS will typically warn you, but if not caught up, it will sever the installment agreement and you will have to re-negotiate it.

Avoiding problems

Contact the IRS as soon as you are having one of the problems above.  If you are having trouble, don’t ignore the situation.  Call the IRS and ask for a month off. Review any changes in your financial situation and re-think whether some other option may now make more sense like Non-Collectible Status, a Lower Installment Agreement, Bankruptcy, or an Offer in Compromise.

 

Written By:

michael-anderson-tax-lawyer-mesa-azAnderson Tax Law
2158 N. Gilbert Rd. Ste 101
Mesa, Arizona 85203

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

 

IRS problems don’t just go away – put the fire out

c4jt321IRS problems don’t just go away.  The cartoon is a clumsy way of making the point.

The point is that you have to do something.  You can’t ignore the problem and just go about your business. Your house is on fire and you may not realize it.

The most common “house-fire” we see is that of a self-employed person who hasn’t filed tax returns in several years.

When this person comes into the office, the house is already burning as one or more of the following problems exist:

  • The IRS has completed certain substitute tax returns that overstate the debt, because several years’ returns haven’t been filed
  • The IRS is using these returns to levy the bank account and to file IRS liens.
  • The IRS has issued levies on vendors and others that may owe the owner money.
  • The business is weakened or worse, because the owner has lost access to funds in the bank account and lost valuable goodwill with vendors and others
  • Because the owner waited so long, legal options available are fewer or require making more painful trade-offs
  • Much of the work needed to try and put the fire out has to be done quickly and without the benefit of necessary information.

These problems all started years before when the owner either didn’t withhold enough tax or withheld employee tax and didn’t pay it.  Instead of making the hard choice to change the business or dump it, he or she sat still and didn’t file returns out of fear.

If you haven’t filed returns and are fearful of what comes next so you aren’t moving on it, you need to do something now.  I suggest you do the following:

  • Gather your tax records for years you think are un-filed – bank statements, expense documents, etc.
  • If you have lost your documents – contact your CPA or my office about making a good faith re-creation of the numbers
  • Gather your current income, budget and asset information
  • Look closely at your income and budget – become very familiar with both.
  • Figure out how much tax you should be withholding on a monthly or quarterly basis and start doing it

Some good new about the fire:

  • It is often the case that if the IRS hasn’t already filed returns for you, the returns required are limited to the last six year period.
  • If the IRS has done returns, they are probably incorrect as they don’t contain business expenses, deductions etc. and you should be able to create the correct returns and replace the IRS returns.  This usually reduces the debt.

Once the required returns are done, the fire can be stopped, as most people qualify for one or more of the following options:

  • Non-collectible status – which means nothing is paid on the debt while the 10 year clock on collection runs
  • Settlement of the debt once and for all for less than what is owe
  • Discharge the debt in bankruptcy
  • Full pay payment plan
  • Payment plan that is “partial pay” meaning that the payment isn’t large enough to pay the debt off before the statute of limitations clock runs out
  • Qualify for “innocent spouse” relief

Cartoon Credit – KC Green

The IRS Final Notice of Intent to Levy or why you should always open your mail

Vintage_mail_bag_at_the_Postal_Museum

The IRS Final Notice of Intent to Levy or why you should always open your mail

I’m surprised at how often my clients bring me a box filled with un-opened mail from the IRS.  To tell you the truth, most of it is junk.

Reminders to pay, debt breakdowns, letters requesting missing tax returns, etc. But hidden within each stack of stuff is almost always a letter I wish the client had opened when it arrived by certified mail.

That letter is called the:  IRS Final Notice of Intent to Levy

Now normally…the IRS will send you several letters telling you it is going to levy before it sends this one.  To most people they all look the same.  This final notice of intent to levy letter isn’t a common letter though, and if you don’t open it on time, you will lose some rights that could have helped you to solve your IRS debt problem.

Why it is so potentially helpful to you?

First, you have to understand that the IRS is required by law to send this letter in order to give you some “due process”.  Not much due process, but just enough to help you figure things out.  You are entitled to an appeals hearing with a supposedly impartial settlement officer on the issue of whether the IRS should be able to levy your bank accounts and garnish your wage or whether there is a alternative that suits the need of you and the IRS more sufficiently.

While waiting for that hearing, the IRS isn’t allowed do any of these nasty things.

In order to get this appeal hearing and exercise your due process rights, you should file the appeal request within 30 days of the date of the letter.  Of course you can’t do that if you haven’t opened your mail.

So when you do open your mail, look closely at it. If you see an LT 1058 or LT 11 somewhere on the letter, it should be this final notice letter we are talking about.  Read it closely.  The appeal documentation and some instructions should be with the letter.

If you feel like you need help filing the appeal call someone who knows how they work.

After you file the appeal, start putting together your financials in detail.  You will need them along with some other IRS forms at some point during the appeals process.  If you don’t take the appeals hearing seriously and fail to supply the correct info and make the right argument, you will lose the appeal and head back to IRS collections for some smacking around in the way of Levy or Garnishment.

What if you opened the letter but didn’t file the appeal on time?

Don’t panic, you can still file the appeal, and the IRS should…give you an appeal hearing anyway.  It’s called an “equivalent” hearing.  (Equivalent to the Collection Due Process Hearing, get it?)

The main difference between the equivalent hearing and the collection due process hearing is that one comes with further appeal rights to tax court and the other doesn’t.

Other more subtle differences exist like, the IRS doesn’t have to grant the equivalent hearing and in some cases it won’t, and you have to file the request for the equivalent hearing within a year of the date of the final notice letter.  A hint..don’t wait a year.

So open your IRS mail, or bring the box to me.  We have a sharp letter opener.

 

 

The Offer in Compromise isn’t over when it’s over

ber0-005The IRS Offer in Compromise isn’t over when you get the letter approving settlement with the IRS.  Don’t get me wrong, the Offer in Compromise (OIC) can be a great solution for some people with IRS debt. But unlike a chapter 7 or chapter 13 bankruptcy case, an offer in compromise isn’t over when you may think it is, it isn’t even over when have paid the agreed upon amount.

What?!!!   It isn’t over when it’s over?  No, it isn’t.  Or as Yogi Berra once said, “The future ain’t what it used to be.”

Unfortunately, IRS rules require that you do a few things to ensure the settlement remains in place.

TAX FILINGS

You have to file your tax returns every year for 5 years and you have to file them on time.  Now…if you don’t file them on time, the IRS won’t just pull the rug out from under you.  It will send you a warning letter before it does because it doesn’t want to waste the time and effort it put into the offer either.  But in any event, if your offer in compromise has been paid, you should triple check the calendar each year to make sure you have filed your return.

TAX PAYMENT

The corollary to the Tax Filing Requirement is the Tax Payment Requirement.  No longer can you wait until after tax day to figure out how you are going to pay the tax debt for the year.  You must make sure that you are withholding or saving enough throughout the year to guarantee that you won’t have tax bill that you can’t pay when the return is filed.  Again, the IRS won’t just kick you out…it will or should send a letter.  But don’t risk this.  Keep withholding correctly and make sure that you have stored enough money away to pay the difference.

 

TAX REFUND

The relief you felt when the offer was accepted will be lessened when the IRS keeps that next tax refund and applies it to the debt.  What?  Yes, even though the amount has been accepted the IRS will and can keep the net tax refund for the year in which the offer was accepted.  Example:  On September 15, 2015 the IRS send you the acceptance letter, in October you file your 2014 return that was on extension and your refund is $3500.00 because you have done such a great job of withholding during the 2014 year.

A bit of advice: Check to see if you are over-with-holding.

 

IRS LIEN

The IRS won’t release that lien until the offer amount is paid in full.  Some people are on payment plans that can last as long as 24 months and under the mistaken impression that the Offer settlement letter will be the IRS’ starting gun for release of that or those liens.  They won’t do it.  You have to pay the offer amount in full.

 

IRS SURPRISES

Sometimes the IRS makes mistakes and doesn’t change the books to show a zero balance and it doesn’t release the lien(s).  You will have to follow up after you have made the last payment to ensure these two things have happened.  A good place to start is by looking at the IRS’ account transcript for each year in question and than contact the IRS to follow up on ensuring all is correct.