Blog
Law Offices of Chance M. McGhee

Call Today for a FREE Consultation

210-342-3400

Archive for the ‘Income Taxes’ Category

A Chapter 13 Plan to Pay Income Tax

December 30th, 2019 at 8:00 am

Here’s an example of a Chapter 13 payment plan to pay income tax, showing how you pay what you can afford and avoid some interest, penalties. 

 

Today we put the facts of last week’s blog post into a Chapter 13 plan, showing how it actually works. You’ll see how Chapter 13 saves you money and avoids stress as you pay off your priority income taxes.

The Example: The Tax, Interest, and Penalties

Assume you owe $10,000 to the IRS for income taxes from the 2016 tax year. That’s for the tax alone without the penalties and interest. Plus you owe interest of $1,200 (currently 5% annually), $2,000 for a failure-to-file penalty (which the IRS assesses  at 5% per month of being late), and $1,650 for a failure-to-pay penalty (calculated at 0.5% per month). So including the current interest of $1,200 and a total of $3,650 in penalties this $10,000 tax has turned into a total debt to the IRS of $14,850. And the interest and failure-to-pay penalty just keep on accruing.

As we showed two weeks ago, this relatively recent $10,000 income tax itself can’t be discharged (written off) in bankruptcy. You’d have to figure out a way to pay it after completing a Chapter 7 “straight bankruptcy” case. In a Chapter 13 case you pay that amount through your court-approved payment plan.

The Tax and Interest vs. the Penalties

In either a Chapter 7 or Chapter 13 case the $1,200 in accrued interest has to be paid in full as well. The interest continues accruing nonstop during and after a Chapter 7 case. The difference is that interest effectively stops accruing under Chapter 13. You don’t have to pay any interest beyond the case filing date as long as you successfully complete your case.

The situation is usually the same with any penalties that accrue beyond the bankruptcy case filing date. Under Chapter 7 the penalties continue to accrue, during the case and after it’s completed. Penalties keep getting added on until the tax is paid in full. But under Chapter 13 the penalties generally stop accruing. This is true as long as the IRS did not record a lien on this specific tax before you filed the Chapter 13 case.  (Prior-recorded tax liens create a number of complications that we don’t get into here.)

So, in a Chapter 7 case (or outside of bankruptcy altogether) you’d have to pay the full $14,850 of tax/interest/penalties. Plus the interest and penalties would continue to accrue until you finished paying off the entire debt. If you’d pay it off slowly in an extended monthly payment plan, the additional interest and penalties would be substantial. Conceivably you could end up paying around $20,000 for the $10,000 tax.

In contrast, in a Chapter 13 case you may only pay the $10,000 tax plus prior-accrued $1,200 of interest. Assuming no tax lien and a successfully completed 0% Chapter 13 case, you’d be paying about $11,200 instead of as much as $20,000. (In a 0% case there’s no money for the general unsecured debts.)

The Chapter 13 Plan

To keep this explanation as straightforward as possible, assume you owe this IRS tax debt and only other simple debts. That is, all your other debts are “general unsecured” ones. They are not secured—such as a vehicle loan, home mortgage, and a debt with any other collateral. They are not special, priority debts like unpaid child support or other recent tax debts. Chapter 13 is actually often very good at handling multiple secured and priority debts. In fact it’s often the very best tool if your situation is complicated with such other tough debts. But for the sake of this example we focus on how Chapter 13 handles this single income tax debt.

So assume you have a lot of medical bills, credit cards, and/or other general unsecured debts—say $90,000 total. Your prior accrued income tax penalties of $3,650 are also general unsecured debts, so now the total is $93,650. This plus the 2016 tax-plus-interest amount of $11,200 means you have just under $105,000 in debt. Here’s how a Chapter 13 plan with these debts could look like.

You and your bankruptcy lawyer would put together your monthly budget. Let’s say that after subtracting you and family’s reasonable living expenses from your monthly income, you’d have $385 per month left in “disposable income.” That would not even come close to paying monthly payments on your $105,000 or so of debt.

The Great Result Here

But this $385 amount would be enough—just enough—to pay off your IRS debt in full in just 3 years. $385 for 36 months is enough to pay off the $10,000 base tax, plus the $1,200 in already accrued interest. It would also pay a relatively modest amount of Chapter 13 trustee’s fees (generally a set percentage of whatever you pay into your payment plan) and your own attorney’s fees (whatever you didn’t pay before filing your case). The law usually allows (indeed requires) these “administrative costs” to get paid before the general unsecured debts receive anything.

So in this example $385 per month for 36 months would pay off the $11,200 priority portion of your tax debt. ($10,000 + $1,200.) But beyond that there would not be any money for the general unsecured debts. This means there would be nothing for the $3,850 in prior accrued tax penalties.

As a result all of your “disposable income” during the 3 years of the plan would go just to pay the tax and prior interest. (Plus the mandatory “administrative costs.”)  Then after the 36th month of payments, your Chapter 13 plan would be finished. At that point all of your general unsecured debts would be legally discharged. This includes the $3,850 in prior tax penalties. In addition, the IRS would then wipe off its books any penalties and interest that would have accrued since the date of your Chapter 13 filing.

After only paying the $10,000 tax plus $1,200 in prior interest, you’d owe the IRS nothing. You’d also be free and clear of all the rest of your debts. After paying only as much as your budget allowed for 3 years, you’d have a completely fresh financial start.

 

Paying Income Taxes through Chapter 13

December 23rd, 2019 at 8:00 am

Chapter 13’s advantages in paying off your priority income taxes become clearer when you see what you don’t have to pay.

 

Last week we got into the advantages of paying priority income taxes through a Chapter 13 “adjustment of debts” case. Those are the usually-recent income taxes which cannot be written off (“discharged”) in bankruptcy. Today we show more clearly how Chapter 13 can be tremendously helpful with income taxes.

The Example: The Tax Breakdown

This example expands on one we introduced last week. Assume that you owe $10,000 to the IRS for income taxes from the 2016 tax year.

In addition there’s a failure-to-file penalty of $2,000 for filing 4 months late without getting an extension. The IRS assesses that penalty  at 5% per month of being late. So here, 4 months at $500 per month = $2,000.

Plus there’s a failure-to-pay penalty of $1,650. That’s calculated at 0.05% each calendar month or partial month that the tax remains unpaid. So here, 33 months or partial months from the April 2017 payment due date to December 2019, at $50 per month = $1,650. (Note that this penalty is reduced to 0.025% per month if you’re in an IRS payment plan.)

You also owe interest on the unpaid tax. It’s more complicated to calculate because the rate changes. It’s been at 5% per year since April 1, 2018 and 4% for two years before that. Plus it compounds daily. To keep it simple, assume for this example that $1,200 of interest has accrued on the $10,000 tax owed.

So combining these, assume you owe $10,000 in 2016 income tax, plus $3,650 in penalties ($2,000 + $1,650), plus $1,200 in interest, a total of $14,850 owed to the IRS for this tax year.

The Tax and Interest vs. the Penalties

1. Accrued interest. If an income tax does not qualify for discharge (under the rules discussed last week), neither does the interest. So during a Chapter 13 case you’d have to pay the tax and the interest (accrued up to the date of bankruptcy) in full. In our example that’s the $10,000 in straight tax plus the $1,650 of interest, or $11,650.

2. Accrued penalties. But the accrued penalties are quite different. These are usually not treated as priority debt but rather as general unsecured debt. (This assumes there’s no recorded tax lien on the tax, which could make the debt partly or fully secured.) In a Chapter 13 case you pay general unsecured debt only to the extent you can afford to do so. This is AFTER paying all priority and appropriate secured debts. Often you don’t have to pay general unsecured debts, including tax penalties, much. It’s not uncommon that you pay nothing.

In our example the $3,650 in penalties is general unsecured debt. So during the course of your 3-to-5-year case you pay this portion only as much as you can afford. You may pay nothing.

3. Ongoing interest and penalties. Usually you don’t pay any ongoing interest or penalties on the tax during the Chapter 13 case. The IRS continues to track it. But as long as you finish the case successfully you will not have to pay any of it. This lack of ongoing interest for 3 to 5 years saves you a lot of money. It also often enables you to end your case more quickly.

Filing the Chapter 13 Case

Now assume you filed a bankruptcy case on December 10, 2019. You were in a hurry to file because the IRS was threatening to garnish your paycheck. The 2016 income tax is not discharged in bankruptcy because it’s  less than 3 years from the tax return filing deadline of April 15, 2017 and the December 10, 2019 filing date.

If you filed a Chapter 7 “straight bankruptcy” that would have provided only limited help. It would have stopped the IRS’s garnishment threat for 3 or 4 months while the Chapter 7 case was active. Then if discharging your other debts would free up enough cash flow so that you could reliably get on an installment payment plan with the IRS to pay off the $14,850 reasonably quickly, then Chapter 7 might make sense.

But that’s a big “if” which doesn’t happen often in the real world.  And even if this scenario were possible, you’d likely pay much more than under Chapter 13. After a Chapter 7 case, you’d have to pay the $3,650 in accrued penalties in full (instead of only in part or not at all under Chapter 13). Interest, and the failure-to-pay penalty, would continue accruing non-stop, until paid off. This adds to the amount you eventually have to pay. Each time you’d make a payment, part would go to that month’s new interest and penalties. So you have to keep paying longer.

Chapter 13 Instead

We’ve explained why his situation should play out much better under Chapter 13. But we’ll show how it actually works over the course of a payment plan in our blog post next week.

 

Priority Income Tax Debts under Chapter 13

December 16th, 2019 at 8:00 am

Chapter 13 gives you huge advantages for paying off your priority income tax debts. You’re protected while you pay what you can afford.


Last week we discussed the advantages of paying priority debts through a Chapter 13 “adjustment of debts” case. We referred to recent income taxes as one of the most important kinds of priority debt. Today we show how Chapter 13 can greatly help you take care of recent income tax debts.

Recent Income Taxes Can’t Be Discharged

The law treats some, usually more recent, income tax debts very differently than other, usually older, income tax debts. Generally, new income taxes are “priority” debts and can’t be discharged (written off) in bankruptcy.

There are two conditions determining whether a tax debt can be discharged. (There are a few other conditions but they are not very common so we don’t address them here.) Bankruptcy does NOT discharge an income tax debt:

1. if the tax return for that tax debt was legally due less than 3 years before you file your bankruptcy case (after adding the time for any tax return-filing extensions) U.S. Bankruptcy Code Section 507(a)(8)(A)(i).

OR

2. if you actually submitted the tax return to the IRS/state less than 2 years before you file the bankruptcy case. Bankruptcy Code Section 523(a)(1)(B)(ii).

Two Examples

Assume you filed a bankruptcy case on December 10, 2019. You owe income taxes for the 2017 tax year. The tax return for that tax was due on April 17, 2018 (because of a weekend and holiday). (This assumes no tax return filing extension.) That’s much less than 3 years before the December 1, 2019 bankruptcy filing date. So, no discharge of the 2017 tax debt, because of the first 3-year condition above.

As for the second condition above, assume again that you filed your bankruptcy case on December 10, 2019.  This time change the facts so that you submitted the tax return late for the 2015 taxes, on October 1, 2018. That’s less than two years before the December 10, 2019 bankruptcy filing date. So because of the second condition above, taxes due for 2015 would not get discharged in bankruptcy

Meeting either of the two conditions makes the tax debt not dischargeable. In the second example immediately above, more than 3 years had passed since the deadline to submit the tax return. (The 2015 tax return was due on or about April 15, 2016.) But less than two years had passed since the actual submission of the tax return. So, no discharge of the tax debt.

With no discharge, you would have to pay that income tax debt after finishing a Chapter 7 case. But there are advantages of paying this priority debt in a Chapter 13 case.

Advantages of Paying Priority Income Tax Debts in Chapter 13

Under Chapter 13:

  1. You are protected from aggressive collection by the IRS/state not for 3-4 months as in Chapter 7 but rather 3-5 years.
  2. This includes preventing any new recorded tax liens, and getting out of any installment payment plans.
  3. The amount you pay monthly to all your creditors, including the priority tax, is based on your actual budget. It’s not based on the often unreasonable requirements of the IRS/state.
  4. The amount your priority tax gets paid each month (if any) among your other debts is flexible. You do have to pay all of the priority tax debt(s) by the time you finish your Chapter 13 case. That’s up to a maximum 5 years. But other more urgent debts (such as catching up on a home mortgage) can often get paid ahead of the taxes.
  5. Usually you don’t pay any ongoing interest or penalties on the tax during the Chapter 13 case. That takes away the need to pay it quickly. Plus the lack of additional interest and penalties significantly reduces the amount needed to pay off the tax debt.
  6. If the IRS/state recorded a tax lien against your home or other assets before you filed bankruptcy, Chapter 13 provides a very efficient and favorable forum to value and pay off that secured portion of the priority debt.

 

Avoid Income Tax Liens with Chapter 13

September 16th, 2019 at 7:00 am

Chapter 13 can prevent income tax liens on dischargeable taxes. But the discharge takes years, and you may have to pay part of that tax.  

 

Two weeks ago we showed how the filing of a bankruptcy case stops the recording of an income tax lien.  A bankruptcy filing imposes the “automatic stay.” That law makes it illegal for the IRS or state tax agency to record a tax lien. (See Section 362(a)(4) and (5) of the U.S. Bankruptcy Code forbidding the creating or enforcing of a lien.) That’s true whether your lawyer files a “straight bankruptcy” Chapter 7 case or an “adjustment of debts” Chapter 13 one.

Then last week we showed how this works specifically in a Chapter 7 case. IF the tax meets all of the conditions for discharge (legal write-off), then your Chapter 7 filing would prevent a tax lien, discharge the tax debt, and forever avoid a tax lien on that tax.

But how about in a Chapter 13 case? We know it would also stop an income tax lien recording, but then what would happen? Which would be better, Chapter 7 or 13?

Dischargeable Tax Debts under Chapter 13 

Assume again that the tax debt at issue meets the conditions for discharge. That tax would get discharged at the end of a Chapter 13 case, like in a Chapter 7 case. But there are two big differences.

Discharge of the Tax Debt Takes Much, Much Longer

First, that discharge of the tax debt would not happened within about 4 months as it would in most Chapter 7 cases. Instead it would happen usually 3 to 5 years later, the length of most Chapter 13 cases.  The automatic stay protection usually lasts throughout that time. So the IRS/state could take no tax collection actions in the meantime, including the recording of a tax lien.

But such a long period of time may allow problems to arise preventing the completion of your case. If you don’t successfully complete a Chapter 13 case the discharge doesn’t go into effect. So there is more risk that an otherwise dischargeable tax debt ends up not discharged. If the tax doesn’t get discharged, the IRS/state could record a tax lien as soon as you were no longer in your Chapter 13 case.

You May Have to Pay on that Tax

Second, under Chapter 13 you could pay part of the dischargeable income tax debt during your case. You generally pay some of your debts through a monthly payment plan. This may include some of your dischargeable tax debt. In a Chapter 7 case, in contrast, usually you pay nothing on a dischargeable tax debt.

Whether you would pay anything on such a tax under Chapter 13, and how much, depends on many factors. These factors focus on the nature and amount of your other debts, and on your income and living expenses. Often, you actually don’t pay anything more in a Chapter 13 case if you have a dischargeable tax debt than if you don’t owe that tax. That’s because you often pay a set amount towards all your debts based on what you can afford. Whatever you may pay towards a dischargeable tax would otherwise have just gone towards your other debts. However, in general under Chapter 13 there’s some risk that you’d pay something on a tax debt instead of nothing.  

The Bottom Line

It is worth emphasizing that if you successfully complete your Chapter 13 case, a dischargeable tax will get discharged. So you would no longer owe anything on it. So the IRS/state would not be able to record a tax lien on it, just like under Chapter 7.

How about a Tax that Can’t Be Discharged?

What if the income tax at issue does not meet the conditions for discharge? A Chapter 7 or 13 filing would stop the recording of a tax lien, at least temporarily. But what happens then? Is Chapter 7 or 13 better in this situation for permanently stopping a tax lien? We’ll cover this next week.

 

Avoid Income Tax Liens with Chapter 7

September 9th, 2019 at 7:00 am

Chapter 7 can prevent future income tax lien recordings against your home, if the tax is truly dischargeable and you have a no-asset case. 


Last week’s blog post was about filing bankruptcy to prevent the IRS/state from recording income tax liens on your home. The “automatic stay”—bankruptcy’s broad freeze of creditor collection actions—stops tax lien recordings immediately when you file your case. To repeat what we said last week:

Federal law is crystal clear that filing bankruptcy stops and prevents “any act to create, perfect, or enforce any lien” against your property. Section 362(a)(4 and 5) of the U.S. Bankruptcy Code. The IRS and the state tax agencies do not dispute this. They cannot record a tax lien against your home or anything you own once you file bankruptcy.

But how this works is quite different under Chapter 7 “straight bankruptcy” and under Chapter 13 “adjustment of debts.” Today we talk about filing Chapter 7 to stop tax liens, next week about Chapter 13.

The Chapter 7 Advantages

The primary benefit of Chapter 7 is speed. Assume you have a tax debt that meets the qualifications for discharge (legal write-off). (See our earlier blog post titled Bankruptcy Writes Off (Some) Income Taxes.)  Most Chapter 7 cases take 3-4 months from filing to completion. Most Chapter 13 cases take 3-5 years. If you have a tax debt that you are able to discharge, doing so quickly makes lots of sense. Chapter 7 is your likely answer.

Another big benefit: Chapter 7 is much more likely to discharge the tax debt without you having to pay any of it. Most Chapter 7 cases are “no asset” ones. This means that all of your assets are “exempt”—protected from liquidation by the Chapter 7 trustee. This usually means that your “general unsecured” debts would get discharged and be paid nothing. A dischargeable income tax debt is a general unsecured debt. So Chapter 7 would usually discharge the tax debt in full, without paying anything on it. (This assumes that you filed the Chapter 7 case before the IRS/state recorded a tax lien. That recording would turn the tax debt into a secured one, which you very much want to avoid.)

Under Chapter 13, in contrast, there is a significant risk that you would have to pay something on a dischargeable tax debt.  We’ll explain how this works in the next blog post. Avoiding that risk, and discharging the tax in just a few months: these both make Chapter 7 a very tempting option.

The Chapter 7 Disadvantage

The potential downside of Chapter 7 is that the automatic stay protection only lasts a short time. You are protected from the IRS’/state’s power to record a tax lien only during the length of the Chapter 7 case. Section 362(c)(2)(A) of the Bankruptcy Code says that the automatic stay ends when the case is closed. Again, that case closure usually happens only 3 or 4 months after your bankruptcy lawyer files your case.

However, IF the tax debt at issue definitely meets all the qualifying factors for discharge, this is NOT a problem. Once bankruptcy discharges any debt, the creditor may no longer take any collection action on it. Section 524(a)(2) of the Bankruptcy Code make any “act… to collect” a discharged debt illegal. This applies to the IRS and state tax agencies just like any other creditor. So, as long as the tax debt at issue will truly be discharged in your Chapter 7 case, you don’t need to worry about any future tax lien on that discharged debt. Clearly, it’s crucial that you have a competent and conscientious bankruptcy lawyer to determine whether your tax is truly dischargeable. If so, then you can rely on Chapter 7 to prevent the recording of a tax lien, discharge that tax debt, and give you freedom forever from a tax lien on that tax.

 

Prevent Future Income Tax Liens

September 2nd, 2019 at 7:00 am

Bankruptcy can prevent future income tax lien recordings against your home. The result: paying nothing on the tax vs. paying it in full. 


Income Tax Liens Are Dangerous

Our last two blog posts were about judgment liens. First was about how filing bankruptcy can sometimes remove, or “avoid,” a judgment lien from your home. Second was about preventing a judgment lien from hitting your home’s title in the first place.

Income tax liens have some similarities to judgment liens and some differences. An important difference is that there is no mechanism for removing a tax lien once it hits your home’s title. This is especially bad and impactful if the income tax debt at issue was one that bankruptcy could otherwise have written off (“discharged”) for you. The recording of the tax lien turns a debt that you could have written off and paid nothing on into a debt you usually have to pay in full.

So, as with judgment liens, it’s much better to prevent the recording of a tax lien by filing bankruptcy beforehand. It’s even more important because you can’t get them off your home’s title, under just about any circumstances. You usually have to pay the tax in full, instead of potentially paying nothing.

How Bankruptcy Stops a Tax Lien Recording

How could filing bankruptcy be so powerful that it stops the IRS/state from recording a tax lien on your home?

It’s the law. Federal law is crystal clear that filing bankruptcy stops and prevents “any act to create, perfect, or enforce any lien” against your property. Section 362(a)(4 and 5) of the U.S. Bankruptcy Code. The IRS and the state tax agencies do not dispute this. They cannot record a tax lien against your home or anything you own once you file bankruptcy.

How Long Does This Protection Last?

Under the right circumstances this prevention of a tax lien lasts forever. It’s permanent.

We referred above to income taxes that can be discharged—permanently written off—through bankruptcy. Some can, some can’t. Mostly it depends on how long it’s been since the relevant tax return was due, and was actually submitted. See our earlier blog titled “Bankruptcy Writes Off (Some) Income Taxes.”)

Assume for today that the tax that you’re worried a tax lien will be recorded on qualifies for discharge.

In that case your bankruptcy should in fact discharge that tax debt. So it will be legally gone after your bankruptcy case is finished. With the tax debt gone there is nothing upon which to record a tax lien.

The Huge Difference

Assume, for example, that you owe $10,000 for a couple years of income taxes to the IRS and your state. These taxes qualify for discharge (mostly by being old enough). Your home has a bit of equity but no more than is generally protected by the homestead exemption. Assume the IRS and state have not recorded any tax liens. If you file a consumer bankruptcy (Chapter 7 or Chapter 13) you would very likely no longer owe any of that $10,000 at the completion of your case.

However, now assume the IRS/state record tax liens on that $10,000 in income tax debt before you file bankruptcy. Those liens attach to the equity in your house. Filing bankruptcy does not affect those tax liens. There is no mechanism for removing the tax liens (as there is for qualifying judgment liens). The liens continue to encumber your title and eat into your equity. If you have less than $10,000 in equity the liens encumber your future equity. The IRS/state will almost for sure require you to pay off the lien in order to release it. They’ll get their $10,000 out of you. And they’ll do so simply because they recorded the tax liens before you filed your bankruptcy case.

Chapter 7 vs. Chapter 13

Which of these is better for you if owe income taxes and are trying to stop the recording of a tax lien? We’ll address this in our next blog post (to be posted early next week). If you need to talk with a bankruptcy lawyer before then about this or anything else, please call us.

 

Bankruptcy Writes Off (Some) Income Taxes

March 4th, 2019 at 8:00 am

Bankruptcy permanently writes off income taxes, as long as the tax meets certain conditions. For some taxes the conditions are easy to meet. 

 

Bankruptcy DOES Write Off Income Taxes

There are certain very special debts that bankruptcy never writes off. Child and spousal support is a good example. See Sections 523(a)(5) and 101(14A) of the U.S. Bankruptcy Code.

Income taxes are different. Income taxes CAN be written off, as long as you meet a few conditions. These conditions mostly tie in to timing—when the tax was due and when (and whether) you filed its tax return.

The Two Timing Conditions

In most people meeting these conditions is straightforward. You essentially have to file your tax returns and wait long enough to comply with for the following two conditions:

  1. You submitted the pertinent tax return to the IRS/state and did so more than 2 years before filing your bankruptcy case. Section 523(a)(1)(B)(ii) of the Bankruptcy Code.
  2. The legal due date for that tax return was more than 3 years before filing your bankruptcy case. Section 507(a)(8) of the Bankruptcy Code.

For example, assume you owe the IRS $5,000 for the 2014 tax year, and you submitted its tax return a full year late—in April 2016. It’s been more than 2 years since that so you meet the first condition. The legal due date for that tax return was in April 2015, which is more than 3 years ago. So you also meet the second condition. So in most situations bankruptcy would write off that 2014 income tax debt of $5,000.

A Few Important Twists about the Timing

Keep three practical considerations in mind about these two time periods:

  1. The 3-year period only starts to run when the tax return was “last due, including extensions.” Section 523(a)(1)(B)(ii). The 3 years only begins at the extended due date. It’s absolutely crucial that your bankruptcy lawyer gets the correct information from you about whether you got an extension that year.
  2. If you’re cutting it close (because you’re in a big hurry to file), the precise tax return due date can be crucial. Remember that taxes are not always due on April 15 and October 15 (for extensions). Weekends and holidays can push the due date out even several days. That means you may have to wait some extra days to file your bankruptcy case to be able to write off that tax debt.
  3. Careful about making a mistake about whether and when you actually submitted your tax return. It may be worth finding out directly from the IRS/state to avoid getting a rude surprise after filing your bankruptcy case.

Other Uncommon Conditions

There are two other conditions that might possibly apply, in more complicated situations.

  1. More than 240 days must pass from when the IRS/state assessed the income tax to when filing your bankruptcy case. Assessment usually happens within a few weeks after you get your tax returns in to the IRS/state. So usually this condition is easily met. It only tends to apply if assessment gets delayed with a tax audit, litigation in Tax Court, a tax appeal, offer in compromise, and other complications.
  2. Regardless of all these timing rules, you can never write off an income tax based on a fraudulent tax return or if you intentionally evade a tax. This is uncommon. It tends to only come up if you were significantly dishonest with the tax authorities.

Conclusion

In most situations you can write off the tax if you filed your pertinent tax return and both the 2-year and 3-year periods have passed. But the intersection between bankruptcy and income taxes is definitely complicated. Be sure to see a competent bankruptcy lawyer if you owe taxes so that you get the full benefit of the law.

 

If You Owe Both 2018 AND Earlier Income Taxes

January 28th, 2019 at 8:00 am

Do you owe income taxes for the 2018 tax year AND already owe for one or more tax years? Chapter 13 may be an especially good tool for you. 


Last week we got into a big advantage of filing a Chapter 13 “adjustment of debts” case in early 2019. It enables you to include 2018 income taxes into your Chapter 13 payment plan. That would:

  1. Save you money on payment of your 2018 tax
  2. Give you invaluable financial flexibility
  3. Stop any present and future tax collections and the recording and enforcement of a tax lien on the 2018 tax

So Chapter 13 is a helpful tool for dealing with taxes you owe for the 2018 tax year. Sometimes it’s even absolutely indispensable—it solves a debt dilemma that appeared otherwise insolvable.

When You Also Owe Income Taxes for Earlier Years

However, Chapter 13 is a particularly powerful tool if you owe not just for 2018 but for other tax years (or year) as well. This is true wherever you stand with the earlier tax debt, whether:

  1. the IRS/state is now aggressively collecting the taxes
  2. you are currently paying them through an agreed monthly payment plan
  3. you haven’t yet filed the tax returns for the prior years 

1. Dealing with Aggressive Collection of Earlier Tax Debt

Is the IRS/state is currently collecting the earlier taxes through garnishment or some other collection procedures?  Then Chapter 13 would very likely greatly help you with both those earlier taxes and the new 2018 one.

The minute your bankruptcy lawyer files the Chapter 13 case for you all the aggressive tax collection actions will stop. That is the power of bankruptcy’s “automatic stay.” You will have 3 to 5 years to deal with ALL of your debts through a payment plan. This includes all your income taxes. The Chapter 13 payment plan will be based on what you can genuinely afford to pay. You may well not need to pay some of your earlier taxes. You will likely not need to pay any more accruing interest and penalties on ANY of the income taxes. You will not need to worry about tax collections throughout the time you’re in the case—including the recording of tax liens. At the completion of your case you will owe no income taxes. Indeed, you will be debt-free altogether, except for voluntary debt such as a home mortgage.

2. In a Monthly Payment Plan

Are you already in a payment plan with the IRS/state for the prior tax debt? If so, finding out that you owe even more for 2018 can be really frightening.

Those monthly installment payments likely contributed to the fact that you owe for 2018. You know that you have to keep up those monthly payments perfectly to avoid the IRS/state from starting or restarting collection actions against you. So you do everything you can to pay them, including not having enough withheld from your paycheck or not paying enough in quarterly estimated payments for the next year’s taxes. As a result you now owe another bunch of taxes for 2018.

Furthermore, you know that you’ll violate your installment agreement if you don’t stay current in future income taxes. As stated in IRS Form 9465, the Installment Agreement Request form, “you agree to meet all your future tax obligations.” So you know you’ll be in trouble when the IRS/state finds out that you owe for 2018.

Chapter 13 avoids this trouble. As mentioned above, the “automatic stay” immediately protects you from the IRS/state. Your monthly installment plan is cancelled right away. You make no further payments on it once you file you file your Chapter 13 case. All your prior income taxes AND your 2018 one(s) are handled through your Chapter 13 payment plan. You get the financial advantages and the peace-of-mind referenced in the above section. When you successfully complete your Chapter 13 case you’ll be totally free of any tax debt.

3. Not Filing Tax Returns

You may be in the scary situation that you can’t pay your taxes so you don’t file your tax returns.

Sometimes this happens because the tax authorities are already actively trying to collect on earlier tax debt. You can’t pay the earlier debt so you figure what’s the use of adding to the amount you already can’t pay.

Or you may be in an installment payment plan and you don’t want to violate it by admitting you owe more for 2018. You know you’ll be in violation of it upon filing the 2018 tax return, so you simply don’t do so.

Or finally, you haven’t filed a tax return for several years, and you know or guess you owe a lot. Now it’s time to file for 2018 and you figure you’ll owe again. You think, why file for 2018 and bring the wrath of the tax authorities onto yourself?

But you know that not filing your 2018 tax return (and any prior unfiled ones) only delays the inevitable. Because of the advantages listed in our last blog post and in the above two sections, Chapter 13 may well be the tool you need.

You’re in a vicious cycle in which you may well be falling further behind instead of getting ahead.

Chapter 13 can likely enable you to break out of that cycle. Not only do you deal with all of your taxes and other debts in a single package. Not only to you often not have to pay all of your taxes. The vicious cycle is broken because your Chapter 13 budget will also address your 2019 and future income tax situation. It does so because your new budget will include enough withholding or quarterly estimated payments so you can stay current for 2019 and thereafter. Again, you should end the Chapter 13 plan being completely tax-debt free.

 

Include 2018 Income Taxes in a Chapter 13 Case Filed in 2019

January 21st, 2019 at 8:00 am

Do you expect to owe income taxes for the 2018 tax year? Starting January 1, 2019 you can wrap that tax into a new Chapter 13 payment plan. 

 

Have you been considering filing bankruptcy and now also expect to owe income taxes for 2018? If so, the start of 2019 gives you more reason to file a Chapter 13 “adjustment of debts” case.

Why? Because filing in 2019 allows you to include 2018 income taxes into your payment plan. That gives you major advantages:

  1. Saves you money on your payment of the 2018 tax
  2. Gives you some very valuable flexibility
  3. Stops tax collections and a tax lien on the 2018 tax

1. Save Money

Wrapping your 2018 income tax debt into a Chapter 13 payment plan usually allows you to pay no more interest and penalties on that tax. The savings can be much more than you think.

You’ll have to pay the 2018 base income tax itself in full, but usually not the interest or penalties. The base tax itself is a “priority” debt that you have to pay. But almost always no interest or penalties accrue on that tax (as long as you finish the case successfully).  

This especially helpful because practically speaking you’d probably not pay that 2018 tax for quite  a while:

  • If you don’t file bankruptcy your other financial pressures would likely prevent you from paying that tax quickly. You might even be tempted to put off filing the tax return, thereby aggravating the problem. The interest and penalties would accrue fast.
  • If you do file a Chapter 13 case in your payment plan you’d most likely pay other even higher priority debts ahead of the 2018 tax. There’s a good chance that tax wouldn’t get paid until near the end of your 3-to-5-year plan. A huge amount of interest and penalties would accrue in the meantime.

2. Valuable Flexibility

Wrapping your 2015 taxes into a Chapter 13 payment plan gives you tremendous flexibility in paying the tax. This can be a real game changer, especially when you have other financial obligations that can’t wait. Chapter 13 allows you to delay paying your 2018 tax debt until you can afford doing so AFTER paying, for example:

  • home mortgage arrearage to save your home
  • unpaid real property taxes, which usually accrue interest at a high rate
  • vehicle loan arrearage or “cramdown” payments to keep your vehicle
  • child or spousal support arrearage
  • other years’ income taxes, including protecting a home or other possession from previously recorded liens

3. Stop Future Tax Collection Including Liens

An important benefit of waiting until 2019 to include the 2018 income tax debt is to stop its aggressive collection. Filing a Chapter 13 case prevents the IRS and/or state from taking just about any collection actions on that tax. This protection against collection stays in effect throughout the years of the case (as long as you fulfill your obligations). Not having to worry about collection of this debt is a huge emotional and practical benefit.

It’s especially nice not have to worry about getting hit with a tax lien. Tax liens are dangerous for a number of reasons. They put your precious assets at risk, thereby giving the IRS/state tremendous leverage. Chapter 13 prevents tax liens while giving you the means to pay off the tax on a relatively flexible budget.

 

Filing Chapter 13 in 2019 to Write Off More Income Taxes

January 14th, 2019 at 8:00 am

Chapter 13 is a riskier, longer, and maybe more expensive way to escape a dischargeable income tax debt—but may still be your best option. 


Last week we showed how to permanently write off (“discharge”) more of your tax debts through Chapter 7 “straight bankruptcy.” Today we show how to do this with Chapter 13 “adjustment of debts.”

Why Use Chapter 13 If Chapter 7 is Faster and Cleaner?

Chapter 7 is a very fast way to discharge an income tax debt that qualifies for discharge. You would very likely no longer owe the tax only about 4 months after filing a Chapter 7 case.

But Chapter 13 case could be much better for you than Chapter 7 for other reasons. Those other reasons may outweigh the benefit of discharging your dischargeable tax debt quickly.

You may owe some other income tax debt(s) which do not meet the conditions for discharge. These other taxes that may be too large to pay off reasonably through a monthly payment plan with the IRS/state.  The other taxes may not qualify for an Offer in Compromise or other settlement. You may well save money and avoid significant risks by handling all of your taxes in a Chapter 13 case.

There are also many other reasons that Chapter 13 would be worthwhile for you, reasons not involving income taxes. It may save your home from foreclosure or your vehicle(s) from repossession. Chapter 13 can deal with a child or spousal support arrearage much better than Chapter 7. There are many other situations where Chapter 13 gives you extraordinary and unique powers. So it can be worthwhile overall in spite of its disadvantages in dealing with a dischargeable tax debt.

How Does Chapter 13 Deal with Dischargeable Income Taxes?

Determining whether a particular income tax debt can be discharged in Chapter 13 is the same as in Chapter 7. Please see our last blog post for the conditions of discharge. These conditions mostly involve how long it’s been since the tax return for the tax at issue was due and when the return was actually submitted to the IRS/state. Sometimes there are other pertinent conditions, but usually it’s just a matter of timing.

Because of how the timing works, there are certain points of time in 2019 when a tax that hadn’t earlier qualified for discharge would then qualify. Again, see our last blog post about those crucial times happening this year.

If your tax does meet the conditions for discharge, it can get discharged in your Chapter 13 case. But this works quite differently than under Chapter 7.

One key difference is that under Chapter 13 there’s a good chance that you would pay something on your dischargeable tax debt.

Under Chapter 13 dischargeable income tax debts is treated like the rest of your “general unsecured” debts. Under your payment plan all such debts get paid the same percentage of their total amounts. That percentage may be any amount from 0% to 100% of their amount, depending on your budget and other factors.

Consider two situations: First, if you have a “0% plan” then you’d pay nothing on the dischargeable tax just like in a straightforward Chapter 7 case. Second, even if you do pay some percentage, often that actually doesn’t increase the amount you pay into your payment. We’ll explain these two situations.

A 0% Payment Plan

In some Chapter 13 cases all the money that the debtor can afford to pay goes to special creditors. All the money going into the Chapter 13 payment plan goes either to secured or to “priority” debts. These would include home mortgages, vehicle loans, nondischargeable taxes, child and spousal support, and such. These usually have to be paid in full before the “general unsecured” debts receive anything.  So during the 3-to-5-year payment plan no money goes to the dischargeable income taxes. That’s a 0% Chapter 13 plan.

Assuming the bankruptcy approves the plan, and you successfully complete it, at its conclusion the dischargeable taxes get discharged, without you having to pay any of it.

Payment Plans Which Do Not Increase the Amount You Pay

In many Chapter 13 plans the amount available for the pool of the “general unsecured” debts is a fixed amount. That amount is based on what you can afford to pay over the required length of the plan. (That required length is usually 3 or 5 years.) That fixed amount does not change regardless how much in “general unsecured” debts you owe. The amount just gets distributed to all those debts pro rata. The more you owe in “general unsecured” debts the lower the percent of the debts that fixed amount can pay.

For example, assume you can afford to pay the pool of “general unsecured” debts a total of $2,000 during the course of the payment plan. All the rest of the money you pay into the plan is earmarked for secured and “priority” debts. Assume also that you have $20,000 in unsecured credit card and medical debts and $5,000 of dischargeable income tax. Without the income tax, the $2,000 would be paid towards the $20,000 in “general unsecured” debts, resulting in a 10% plan. ($2,000 is 10% of $20,000.) Now when you add in the $5,000 tax, there’s a total of $25,000 of “general unsecured” debt. $2,000 is 8% of $25,000, resulting in an 8% plan.

You would be paying no more—the fixed amount of $2,000—over the length of your plan. The fact that you owe the $5,000 in dischargeable tax would not increase the amount you would pay. Then at the successful completion of the case all remaining “general unsecured” debts, including whatever was remaining on the dischargeable tax, would be forever discharged.

Conclusion

So you see that Chapter 13 is a slower and somewhat riskier way to discharge an income tax debt. Plus you may have to pay a portion of the tax instead of quickly discharging all of it under Chapter 7. But then again you may not have to pay anything on it, as described above. In any event, the delay and risks may well be worthwhile. Your bankruptcy lawyer will help you weigh all the advantages and disadvantages so that you can make the right choice.

 

Call today for a FREE Consultation

210-342-3400

Facebook Blog
Back to Top Back to Top