Blog
Law Offices of Chance M. McGhee

Call Today for a FREE Consultation

210-342-3400

Archive for the ‘income tax returns’ tag

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.

 

Filing Bankruptcy in 2019 to Write Off More Income Taxes

January 7th, 2019 at 8:00 am

With smart timing you can discharge—legally and permanently write off—more income tax debts, even with a standard Chapter 7 case. 

 

The right timing of the filing of a bankruptcy case can make a tremendous difference. Our last 8 blog posts have all been about smart timing. If you need to use the bankruptcy laws to get relief from your creditors, it’s only sensible to get as much relief as the laws can give you by timing it right.

The discharge of income tax debts is particularly timing sensitive.

How Chapter 7 and Chapter 13 Conquer Income Tax Debts

Filing bankruptcy with smart timing in 2019 conquers your income tax debts in two main ways:

  • Discharge (legally write off) more of your tax debts (likely for the 2015 tax year). This applies to both Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts.”
  • Include any taxes owed for the 2018 tax year in your Chapter 13 payment plan. This gives you huge advantages.

Today we’ll show the first part—how to discharge more income taxes in 2019 with a Chapter 7 case. We’ll cover the Chapter 13 aspects in the next two weeks.

Is Chapter 7 “Straight Bankruptcy” Good Enough?

You may be surprised that income tax debts can be discharged under Chapter 7 just like most other debts. They are discharged just as completely as a medical bill or credit card balance. You just need to time it right. You do also need to meet some other conditions. But much of the time those other conditions are met rather easily.

What’s the easiest way to deal with a tax debt?  You may have heard that the more complicated Chapter 13 is better if you owe income taxes. That’s often true, especially if you owe for multiple years and/or for more recent tax years.

However, under the following circumstances Chapter 7 is likely better:

  • All of the income taxes you owe qualify for discharge
  • Some but not all of your income taxes qualify for discharge, but you can handle the rest either through:

The main advantage with Chapter 7 is speed. An income tax that qualifies will be forever discharged. This will usually happen about 4 months after you file your Chapter 7 case. Your whole case will, in most situations, be fully completed at that point. You can get on with your life. In contrast, a Chapter 13 case usually takes at least 3 years and can stretch as long as 5.

Discharge More Income Tax under Chapter 7

There are two main timing conditions for discharging income taxes through Chapter 7. The day that your bankruptcy lawyer files the case must be both:

1) at least 3 years past when the applicable tax return was due, adding any time for extensions to submit the return (Section 507(a)(8)(A)(i) of the U.S. Bankruptcy Code.)

2) at least 2 years past when the tax return was actually submitted to the IRS or state tax agency (Section 523(a)(1) of the Bankruptcy Code.)

Again, there are other conditions. Some involve timing, such as additional time added if you’ve made an offer in compromise on that tax, or filed a prior bankruptcy. (Section 507(a)(8)(A)(ii).) The other main condition is if you “made a fraudulent return or willfully attempted in any manner to evade or defeat such tax.” (Section 523(a)(1)(C).) A recorded tax lien on the tax would add some additional complications. But these additional conditions often don’t apply. If you ARE concerned that any might apply to you, tell your lawyer early in your first meeting.

Applied to Income Tax Owed for 2015

Let’s apply this to a tax debt for the 2015 tax year.

If you owe income taxes for 2015, when would you meet the first of the two main timing conditions? The 2015 tax return was due April 15, 2016. So you need to file your Chapter 7 case 3 years after that, after April 15, 2019. So then the required 3 years will have passed since that tax return was due.

This assumes you didn’t get a tax return filing extension. What happens if you did? That year the standard extension to October 15, 2016 fell on a Saturday. So the extended deadline would have actually been Monday, October 17, 2016. (As you can see, these kinds of minor-seeming details can be crucial.)  So if you got this extension you’d have to file your Chapter 7 case after October 17, 2019.

How about the second of the above two conditions? When did you submit your 2015 tax return(s) to the IRS/state? You have to make sure at least 2 years have passed since you’d submitted it/them. If submitted by either the regular due date of April 15, 2016 or the extended date of October 17, 2016, then you’ve already met this 2-year condition (as of the writing of this blog post). If you submitted the return(s) any later, you have to make sure that you meet this 2-year condition.

An Example

Assume that you:

  • owed $7,000 to the IRS for 2015 income taxes
  • submitted that tax return to the IRS on or before April 15, 2016 without an extension
  • did not pursue an Offer in Compromise or file an interim bankruptcy case, or if you did the resulting additional time has passed
  • the tax return was not fraudulent and you didn’t “willfully attempt” “to evade or defeat” the tax

If you now file a Chapter 7 case after April 15, 2019, this $7,000 tax debt would almost certainly be completely discharged within 4 months of filing. If you file before then this tax debt would not be discharged. See a competent bankruptcy lawyer as soon as possible to determine what’s best for you regardless.

 

Fully Complying with Your Chapter 13 Case

March 12th, 2018 at 7:00 am

Besides fulfilling the terms of your Chapter 13 payment plan, you may need to make other payments and meet other requirements. 

 

The bankruptcy court’s approval of your payment plan (at the Confirmation Hearing) happens about 2-to-4 months after filing your case. At that point your Chapter 13 case is fully on its way. You likely have about 3 to 5 years altogether to finish the case. Having gotten to this crucial point, there are a few other crucial steps you need to fulfill to successfully finish your case.

Last time we got into three of these:

  • Do your “debtor education”
  • Avoid or defeat “nondischargeability complaints”
  • Pay your Chapter 13 plan payments

Today we lay out two other crucial steps.

Pay Any Obligations NOT Within Your Plan Payment

In many Chapter 13 cases you pay nothing to your creditors except the single plan payment each month. The trustee divides that payment among your creditors as laid out in your court-approved plan. You pay nothing else to any creditor.  

But in other cases, you pay one or more creditors directly. This may be referred to paying “outside the plan.”

To be clear, you are not paying these secretly. Your plan clearly refers to these debts and their payments. So the bankruptcy court approves these payments. They’re just not included within the single monthly plan payment, for various possible reasons. (See the explanation in paragraph 3.1 of the official Chapter 13 Plan form.)

Often these are ongoing payments on secured debts such as home mortgages or vehicle loans. Direct payments are more likely used when you’re current and are simply continuing to make the regular payments. In some jurisdictions it’s considered easier for everybody that you continue to pay such straightforward payments directly to the creditor. Paying them through the trustee is seen as causing too much delay and accounting confusion.

Naturally it’s essential that you know whether all of your creditors are being taken care of through the single plan payment, or whether there’s a creditor or two you need to pay directly. Your income and expense schedules should make that clear, as well as the plan itself. But if you have any doubt, be sure to ask your bankruptcy lawyer.

Do Anything Else Required

Two documents combined—your plan and the Order Confirming Plan signed by the judge—are the law of your case. These documents contain requirements beyond making payments. They include some standard ones that apply to just about all consumer debtors. There may also be some special requirements for you.

The standard requirements usually include:

  • providing the trustee with copies of your annual income tax returns (paragraph 2.3 of the official Chapter 13 Plan form)
  • turning over to the trustee “income tax refunds received during the plan term” (paragraph 2.3 of the official Chapter 13 Plan form)
  • avoid using credit without prior Chapter 13 trustee or bankruptcy court permission

Special requirements can include:

  • a specified deadline to sell an asset
  • permission for you to use an income tax refund for a specific expense, such as a vehicle repair
  • a requirement to report when an unemployed spouse gets employed

Notice that these special requirements often relate to anticipated changes to your income, expenses, or assets. These changes can directly affect your future obligations under your Chapter 13 case. They may well require you to adjust the payment terms of your plan in the future.

Conclusion

It does take consistent effort to complete a Chapter 13 case successfully. But that effort is worthwhile because it gains you tremendous benefits. Chapter 13 provides many tools that Chapter 7 cannot. Through those tools you can likely meet some otherwise impossible goals. Once you’ve decided that these goals are worthwhile, usually the effort will be worthwhile as well. 

 

Buy Lots More Time to Deal with Multiple Years of Income Tax Debts

October 27th, 2017 at 7:00 am

If you have an income tax debt that qualifies for discharge and also some tax debt that doesn’t, Chapter 13 is often your best option. 

Stopping Tax Liens through Chapter 13 

In our last blog post we showed how Chapter 7 might prevent an income tax lien from hitting your home. It stops the recording of the tax lien through the power of the “automatic stay,” which stop virtually all creditor collection activities. And then you get a discharge (write-off) of the tax debt.  But then we added a twist: owing one or more additional tax years’ of debt which does not qualify for discharge. What if you have a tax that meets the conditions for discharge and one or more years’ that don’t? We showed how sometimes Chapter 7 can deal with this effectively, if the still-remaining tax debt is manageable.

But what if the taxes you still owe are not manageable? In a Chapter 7 case the protection of the “automatic stay” ends as soon as the case ends, usually just 3-4 months after it’s filed. So after that you could easily get a tax lien recorded against your home for the still-owed taxes.

Last time we ended by saying a Chapter 13 “adjustment of debts” could be a better option in these situations.

An Example

Let’s show how Chapter 13 could be a better option with an example.

Assume that you owe income taxes of $24,000—$8,000 for the each of the 2012, 2013, and 2014 tax years. The 2012 and 2013 taxes meet all the conditions for discharge. The 2014 one doesn’t, mostly because it hasn’t yet been 3 years (as of when this is being written) since the date its tax return was due on April 15, 2015.

On advice of your bankruptcy lawyer you file a Chapter 13 case. You do so because you:

  • couldn’t reliably pay into a monthly installment plan with the IRS/state for the remaining $8,000 tax owed for 2014. That’s because you have some other important debts that would also survive the Chapter 7 case. In particular you’re behind on your home mortgage and child support payments. Support enforcement is getting very aggressive, and you don’t want to lose your house. Chapter 7 would not help with these.
  • don’t qualify for Chapter 7 under the “means test.”  Your income under that test is too high, and your allowed expenses leave you with too much disposable income. You don’t have Chapter 7 as an option.
  • need to file a Chapter 13 case for its other benefits. You want to get lots of protected time to catch up on your first mortgage and your child support. Chapter 13 gives you strong tools for dealing with these special debts (and many others).

(Note that any one of these reasons may well be enough to make Chapter 13 worthwhile or appropriate. The particular combination of facts here would very likely make Chapter 13 the right choice.)

The Example’s Chapter 13 Plan

In this example the $16,000 of 2012 and 2013 tax debts would be treated as “general unsecured” debts. This means that they’d be paid—if at all—to the same extent as your other ordinary debts with no collateral. In most Chapter 13 cases there’s only a set amount available to pay to the entire pool of “general unsecured” debts. This means that usually that $16,000 would just go into the pot with those other debts, and you’d pay no more than if there was no $16,000 tax debt. That $16,000 tax debt just reduces how much other “general unsecured” debts get paid, without increasing how much you pay. In fact, in many bankruptcy courts you’re even allowed to pay nothing to the “general unsecured” debts. That happens if all your money during the life of the plan goes elsewhere.

Speaking of money going elsewhere, you’d pay the remaining $8,000 for the nondischargeable 2013 tax during the course of your 3-to-5-year Chapter 13 payment plan. It’s a “priority” debt, one that you have to pay off during your case. Throughout that 3-to-5-year period you’d be protected from the IRS/state by the “automatic stay.” That’s because it usually protects you throughout the years of the case (not for just 3-4 months like Chapter 7). That means no tax lien being recorded against your house throughout your case.

Your payment plan would also include money to catch up on your home mortgage and on your child support. These two debts could be paid ahead of or alongside the “priority” tax debt.

The End of the Chapter 13 Case

At the end of your successful Chapter 13 case the following would happen:  

  • Having by that point paid off the $8,000 “priority” tax debt, any interest and penalties that would have accumulated on that tax would be forever waived.
  • With that tax debt gone there’d be no further risk of a lien against your home from that tax.
  • To the extent that the $16,000 in older taxes would not be paid, they’d be permanently discharged. (This would usually be most, or sometimes even all, of the $16,000.)
  • Your home mortgage and child support would be caught up as well.
  • You’d be tax-debt-free, and altogether debt-free except for the on-time first mortgage.

 

Timing: Writing Off Income Taxes

September 22nd, 2017 at 7:00 am

Usually you can discharge—write off—an income tax debt by just waiting long enough. Here’s how to discharge a tax debt under Chapter 7.  

 

Timing is Just About Everything

If you owe an income tax debt and file a Chapter 7 “straight bankruptcy” case, one of two things will happen to that debt:

  1. It will be discharged—permanently written off—just like any medical bill or other ordinary debt, or else
  2. Nothing will happen to that tax debt; you’ll continue to owe it as if you hadn’t filed bankruptcy.

The difference, most of the time, is timing—when you file your Chapter 7 case.

The Timing Rules

In most situations a Chapter 7 case will discharge an income tax debt if you meet two timing conditions. The date you and your bankruptcy lawyer file that case must be both:

  1. at least 3 years after the tax return for that tax was due, and
  2. at least 2 years after that tax return was actually submitted to the IRS or state tax authority.  

See Sections 507(a)(8)(A)(i) and 523(a)(1)(B) of the U.S. Bankruptcy Code.

One important twist: IF you got an extension to file the applicable tax return, then the above 3-year waiting period doesn’t begin until the end of the extension. Section 507(a)(8)(A)(i). For example, let’s say you got a 6-month extension from April 15 to October 15 of the pertinent year. So then the 3-year period starts on that October 15 instead of on the usual April 15 return filing due date.

These Rules Applied

Assume you owe $7,500 in income taxes for the 2013 tax year. You’d asked for a 6-month extension to October 15, 2014. But then you didn’t actually submit the tax return until December 31, 2014.  

If you’d file a Chapter 7 case at any point before October 15, 2017, you’d continue owing the $7,500 tax. If you’d file on or after October 15 you would likely not owe a dime.

That’s because on October 15, 2017:

  1. At least 3 years would have passed since the extended due date of October 15, 2014, and ALSO
  2. At least 2 years would have passed since actually submitting the tax return on December 31, 2014.

Or, take with same $7,500 tax debt for the 2013 tax year with similar facts but a couple differences. You didn’t ask for an extension, but also didn’t submit the tax return until December 31, 2015.

Under these facts you’d have to wait until after December 31, 2017 to file the Chapter 7 case.

That’s because:

  1. 3 years since the tax return was due—on April 15, 2014—would have passed on April  15, 2017, but
  2. 2 years from the day the return was actually submitted would not pass until December 31, 2017.

Other Conditions

Earlier we said that “in most situations” Chapter 7 discharges income taxes debt when you meet the two timing conditions. So what are the other situations when taxes would not be discharged, even after meeting the 2-year and 3-year conditions?

There are two sets of them.

The first set comes into play if you made an “offer in compromise” to the IRS or state to settle the debt, or if you had filed a prior bankruptcy case involving this same tax debt. Since these are unusual situations, and the rules are detailed, talk with your bankruptcy lawyer if they apply to you.

The second set applies in situations in which the taxpayer “made a fraudulent return or willfully attempted in any manner to evade or defeat such tax.” Section 523(a)(1)(C).  Different bankruptcy judges interpret this language differently. For example, is it a willful attempt to evade a tax to merely not submit its tax return when due, even if you submitted it voluntarily a year later? How about if you didn’t submit the tax return until the IRS personally contacted you to do so? Again, talk with your bankruptcy lawyer about how this part of the Bankruptcy Code is interpreted by your court. 

 

Call today for a FREE Consultation

210-342-3400

Facebook Blog
Back to Top Back to Top