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Archive for the ‘tax returns’ tag

$1,200 Coming Soon to Most U.S. Adults

March 30th, 2020 at 7:00 am

The huge emergency coronavirus law will provide, “as rapidly as possible,” over 80 percent of American adults with money, many getting $1,200.   


On Friday (March 27) Congress passed and the President signed into law the Coronavirus Aid, Relief, and Economic Security Act. Also known as the CARES Act, better known as the massive $2.2 trillion pandemic relief law. The stated purpose of this 880-page law:

Providing  emergency  assistance  and  health  care  response  for  individuals,  families  and  businesses  affected  by the 2020 coronavirus pandemic.

One of its major provisions is to provide most American adults a payment directly from the U.S. government. This is estimated to cost $290 billion, or about 13% of the $2.2 trillion total. This blog post discusses how much each person will receive, who will and will not, and other urgent details.

How Much Money?

This is probably the most straightforward part of this law, but it has some important twists and turns.

Every “eligible individual” will receive $1,200, if his or her adjusted gross income is no more than $75,000. If the adjusted gross income is more than $75,000, the $1,200 is reduced by 5 percent for any amount over $75,000. This means that individuals with adjusted gross income of $99,000 or more will receive nothing.

If you file a joint tax return, the joint payment will be twice as high, $2,400. And your joint adjusted gross income can be twice as high, $150,000, for the two of you to receive the full $2,400. Income beyond that would reduce the amount paid by 5 percent of the amount over $150,000.

If you file your federal tax return as a “head of household,” the adjusted gross income trigger amount is instead $112,500.  (This tax filing status is usually for single parents with children.) 

In addition to the $1,200 (or less) per adult, you receive $500 for each “qualifying child.” (See the IRS’ Qualifying Child Rules.)  In general, a qualifying child is any dependent of a taxpayer under the age of 17.  So dependents aged 17 or older do not qualify for the $500 payments.

An example: a family of two spouses filing jointly, with two under-17 children, would receive $3,400: $2,400 + $500 + $500.)

Technically, the IRS is treating this money as an advance tax credit. It will not be considered taxable income on your 2020 tax return.

Which Year’s Income Counts?

Practically speaking, look to the adjusted gross income on either your 2018 or 2019 federal tax return. The 2019 amount will count if you’ve already submitted it, or likely will if you submit it very soon. Otherwise look to your 2018 adjusted gross income.

Note: the IRS has postponed the usual April 15, 2020 deadline for submitting 2019 tax returns until July 15, 2020. (See our last week’s blog post about this.) So if it’s to your advantage to use your 2018 income, consider waiting to submit 2019 until after receiving this relief payment. On the other hand, consider filing your 2019 tax return quickly if your income went down, qualifying you for more money.

Under the language of the law it’s your 2020 income that actually counts because it’s a credit for this year. But of course nobody knows for sure how much your 2020 income will be. So the law has the IRS use your 2019 or 2018 income amount.

So what happens if you get the relief payment but your 2020 income is higher and would have reduced the payment? Regardless, you don’t have to pay back any of  the payment.

Who Is an “Eligible Individual”?

The main people who don’t qualify are “nonresident aliens” and “dependents” who can be claimed on someone else’s tax return.

Individuals on Social Security who have no other income and may not file a tax return are eligible. Individuals who have little or no income, or who receive federal benefits, are all eligible. There’s no minimum income requirement. The person just can’t qualify as a dependent for someone else, and must have a Social Security number.

What If You Owe the IRS, a Federal Student Loan, or Child/Spousal Support?

With tax or student loan debt, it doesn’t matter. The IRS can’t set off the relief check against federal taxes or student loans you owe. This is according to Sen. Chuck Grassley, chair of the Senate Finance Committee.

“The only administrative offset that will be enforced applies to those who have past due child support payments that the states have reported to the Treasury Department,” he said.

What If I Have Other Questions?

The law leaves lots of details to be worked out by the IRS. It has a special webpage called “Coronavirus Tax Relief” where it will have updated information. As of our writing of this blog post, it says the following:

Stimulus payment checks: No information available yet, No sign-up needed

Instead of calling, please check back for updates.

Please also check back with us here on our website about the timing and other practicalities of these relief payments. The statute simply says that the Department of Treasury shall pay them “as rapidly as possible.” It will take at least three or four weeks, and maybe more. We’ll dig into these important details and tell you when we know more.

In the meantime, you can also call us, your bankruptcy lawyers. We are following this closely.

 

Tax Filing and Payment Extended to July 15

March 23rd, 2020 at 7:00 am

The federal April 15, 2020 tax filing and payment deadlines have been postponed to July 15, 2020.  Also, no interest or penalties accrue. 

 

Federal Income Tax Return Deadline Postponed

Responding to the COVID-19 pandemic, the IRS has postponed the deadline to file federal income tax returns by 3 months. This was announced (on Twitter, no less!) on Friday, March 20, and then explained in more detail on Saturday.

This tax return postponement applies to all individuals, but also more broadly. It includes every legal “person”:  “an individual, a trust, estate, partnership, association, company or corporation.” IRS Notice 2020-18. So it covers all individuals and businesses.  

Federal Income Tax Payment Due Date Postponed

Just as important, the date that tax payments are due is also postponed from April 15 to July 15, 2020. (The IRS actually announced this two days earlier, on Wednesday, March 18, 2020. IRS Notice 2020-17.)

This applies more broadly than just taxes due for the 2019 tax year. For those paying estimated income taxes quarterly, the payment that was due April 15 is now instead due on July 15, 2020.

There’s no limit to the amount of tax amount postponed. There was a prior maximum amount postponed (in IRS Notice 2020-17) but that maximum has been eliminated. IRS Notice 2020-18, Section III, paragraph 2.

No Interim Interest and Penalties

Since taxes previously due on April 15 are now due on July 15, 2020, no interest or penalties will accrue during those 3 months. As the official Notice states:

the period beginning on April 15, 2020, and ending on July 15, 2020, will be disregarded in the calculation of any interest, penalty, or addition to tax for failure to file the Federal income tax returns or to pay the Federal income taxes postponed by this notice. Interest, penalties, and additions to tax… will begin to accrue on July 16, 2020.

IRS Notice 2020-18, Section III, paragraph 5.

No Extension Needed

This postponement of tax returns and tax payments is automatic. You don’t need to file any extension forms.

If you’ll need more time past July 15, the IRS says:

Individual taxpayers who need additional time to file beyond the July 15 deadline can request a filing extension by filing Form 4868 through their tax professional, tax software or using the Free File link on IRS.gov. Businesses who need additional time must file Form 7004.

IR-2020-58.

Tax Refunds Not Affected?

You may well be expecting a tax refund and so want to file as soon as possible. The IRS is encouraging you to do so:

The IRS urges taxpayers who are due a refund to file as soon as possible. Most tax refunds are still being issued within 21 days.

IR-2020-58. If you need your refund, the pandemic makes it all the more important to file as soon as possible.

ONLY April 15, 2020 Deadlines Affected

Things are changing fast, but at the moment this postponement does not apply to any other deadlines. For example, there’s no current extension for the March 16, 2020 deadline for corporate tax returns for tax year 2019 or the May 15, 2020 deadline for tax-exempt organizations. Also, the regular filing/payment date of July 15, 2020 still applies for quarterly filers. Again, these may also change.

State Income Tax Deadlines

Many states with income taxes have already matched the IRS’s postponement of tax returns and payments. For example:

  • California had earlier postponed to June 15 but extended to July 15 to match the IRS.
  • New Jersey’s legislature unanimously passed a bill last week to the likely same effect.
  • Montana’s governor on Friday postponed state filing and payment deadlines to April 15.
  • Arizona’s governor and then its Dept. of Revenue postponed the April deadlines to July.

It’s reasonable to believe that all or most states will follow the IRS’ lead, and do so quickly. So, please check with your own state’s taxing authority for updates.

 

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.

 

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.

 

The Surprising Benefits: Chapter 7 AFTER the Recording of an Income Tax Lien

August 6th, 2018 at 7:00 am

Under certain circumstances a recorded tax lien does NOT require you to pay a dischargeable tax after Chapter 7, or at least not in full.

 

The last two blog posts have been about the benefits of preventing an income tax lien recording by filing bankruptcy. That’s especially helpful if the tax at issue is an older one that can be discharged—legally written off. The recording of a tax lien can turn such a tax debt from one you don’t have to pay at all into one that you have to pay in full. (See the IRS Notice of Federal Tax Lien form.)

But what if the IRS or state has already recorded a tax lien against you, before you could file bankruptcy? You’re likely in even more financial distress after that tax lien recording than you were before. Could filing bankruptcy still help with that tax debt even after the lien recording?

Yes, both Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” could help. They could each do so in different ways. And they could each help whether the tax at issue met the conditions for discharge or instead was a newer tax that did not.

Today’s blog post covers how Chapter 7 can help with a recorded tax lien on a dischargeable tax debt. We’ll cover how Chapter 13 helps in this same tax situation next week.

The Effect of a Tax Lien Recording

In most situations the recording of a tax lien on an otherwise dischargeable tax requires to pay that tax. Again, it turns a tax that you wouldn’t have had to pay into one you have to pay in full.

How does it do that? Basically, IRS’/state’s recording of a tax lien turns an unsecured debt into a secured one. The tax meets the conditions for discharge (mostly by being old enough), but the IRS/state now has rights over your assets. You have to pay the otherwise dischargeable tax if you don’t want to lose those assets.

What assets? Which of your assets would you lose after the recording of a tax lien if you didn’t pay the tax? That’s a crucial question. That’s because under certain circumstances you might not need to pay all the tax, even after a tax lien recording.  You might not have to pay any of the tax. It depends on which of your assets, if any, the tax lien attached to.

Assets Attached by the Tax Lien

Let’s be clear. Most of the time the recording of a tax lien results in you having to pay the tax. That’s because that tax lien attaches to your assets or property that you don’t want to lose. A recorded IRS Notice of Federal Tax Lien, for example, applies to “all property and rights to property belonging to this taxpayer for the amount of these taxes… .”  So if it applies to everything that belongs to you, you pay the tax to avoid losing those assets.

But sometimes the tax lien might attach to little, or even nothing, of value. Or what it attaches to is worth much less than the tax debt. Then you may not end up paying the whole tax debt amount, or even any of it. (See the IRS’ Guidelines for Processing Notice of Federal Tax Lien Documents, including about lien releases and withdrawals.)

Examples

For example, assume you owe $10,000 in old, dischargeable income taxes but own very little—say a total of $2,500 fair market value in household goods and personal effects. There’s a recorded tax lien on that $10,000 debt covering all your property. With a Chapter 7 case you discharge the $10,000 debt, but recorded tax lien on the $2,500 in property survives. The IRS/state has limited leverage in making you pay any more than $2,500. So there’s a good chance you could settle the matter by agreeing to pay around that amount.

Another example: the IRS/state has recorded a tax lien in your county real estate recorder’s office, placing a lien on your home. (Under many state’s laws that recorded lien would only apply to real estate, not to any other personal assets.) But what if you do not own a home or any other real estate in that county? What if you recently lost your home to foreclosure? Or what if your home has no equity at that time and likely won’t for many years? In these scenarios the IRS/state would have to concede that its lien is essentially worthless. Your bankruptcy lawyer may well be able to convince the IRS/state to release or withdraw its lien as being of no collection value.  

 

The Surprising Benefits: Break a Tax Payment Plan through Chapter 7

June 4th, 2018 at 7:00 am

Can’t afford your current IRS/state monthly payment plan? Have an upcoming additional new year of taxes to pay? Chapter 7 can often help.

Tax Installment Agreement You Can’t Afford

It’s a common problem. You owed income taxes a year or two ago when you sent in your tax returns. Money was very tight so you couldn’t just pay it off. You found out that the IRS let you pay that unpaid tax through a monthly installment plan. If you also owed state income taxes, you likely found out that your state taxing authority lets you do this, too.

So you set up the payment plan with the IRS and/or state. But your financial situation only got tighter because now you had a new monthly obligation you absolutely had to pay.  So now you are struggling to pay the monthly tax payment along with your living expenses and other debts. You wish there was a way to get out of your IRS/state monthly tax payment and other debts.

Tax Installment Agreement You Are About to Break

If you were desperate to have the money to pay the monthly tax payment (along with your other obligations), you may have arranged to withhold less from your paycheck during the current year. Or if you’re self-employed you may not have paid enough estimated quarterly taxes.

If so, you’ll likely owe income taxes again when your next tax returns are due. Assuming you couldn’t then immediately pay this new tax owed, this would likely be considered a breach of your current payment plan with the IRS/state.

At that point the IRS/state could terminate the monthly payment agreement. It could then take aggressive collection action against you, something you really want to avoid.

Or instead the IRS/state might let you roll the new tax owed into your current installment agreement. But that would likely result in an increased monthly payment. This only aggravates your problem of having more debt than you can handle.

Even if you could afford to pay an increased monthly tax installment payment, you’d be going backwards instead of making progress. The tax interest and penalties would add significantly to the amount you have to pay. You’re in vicious cycle and don’t see a way out of it.

Two Ways Out

But there ARE potentially two ways out: Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts.” We’ll cover Chapter 7 today; Chapter 13 next week.

Chapter 7 Discharge of Tax Debts

Which Chapter is better depends on many factors, but especially on whether your older income tax debts are “dischargeable.” This means whether the taxes can be legally, permanently written off in bankruptcy.

Some income taxes CAN be discharged. Basically, certain amounts of time must pass since the time the tax return for the tax was legally required to be submitted, and since the tax return was actually submitted. If you meet those conditions (and some other possibly relevant ones), the tax debt is dischargeable just like any ordinary debt.

When Chapter 7 Makes Sense

If ALL the income tax debt in your present monthly payment plan is dischargeable, Chapter 7 likely makes sense. You’d not have to pay anything anymore on that monthly payment plan. If you anticipate owing new taxes with your next tax return(s), you could likely enter into a fresh monthly payment plan for these taxes. You wouldn’t end up breaching your present payment plan because you would no longer owe anything on it.

If SOME of the income tax debt in your present monthly payment plan is dischargeable, Chapter 7 may also make sense. You would no longer have to pay that part of your taxes, which would presumably reduce your monthly tax payments. If that reduced amount is one that you could afford—especially after discharging all or most of your other debts—Chapter 7 would help enough to justify using this tool.

If Chapter 7 Isn’t Good Enough

If you can’t discharge all your income taxes, or enough, through Chapter 7, consider Chapter 13 “adjustment of debts.” We’ll explain in our blog post next week.

 

What the IRS/State Can and Can’t Do After You File Bankruptcy

February 16th, 2018 at 8:00 am

Filing bankruptcy stops tax collection just like it stops other debt collection by more conventional creditors. But there are exceptions.  

 

The last several weeks of blog posts have been about bankruptcy’s “automatic stay” protection from creditor collections.  We’ve also gotten into many of the exceptions to that protection—when certain creditors CAN take certain actions.

Today we focus on some very limited exceptions to the automatic stay protection, those which apply specifically to income taxes. In bankruptcy you don’t want surprises, especially from a tax collector. These limited exceptions are reasonable. But it’ll still help you to understand them in order to not be surprised by them.

Tax Determination is Allowed, Tax Collection is Not

Simply put, the exceptions to the automatic stay protections are about determining the amount of tax owed. The IRS and the state tax authorities can take steps during bankruptcy to figure out how much you owe. They can make you do what the law requires along these lines. For example, they can require you to file your tax returns, regardless that you’ve filed bankruptcy. But then they can’t take any action beyond that to collect any taxes owed.

The IRS/State CAN’T. . .

The automatic stay immediately stops virtually all debt collection activity against you when you file bankruptcy. This protects you, your income, and your assets. Everything is put on hold so that the bankruptcy laws can be applied to your entire financial situation.

Debts that the law discharges—legally writes off—disappear. Other possible debts that the law does not discharge you continue to owe. With income taxes, if they’re old enough and meet other conditions, they’re discharged. Otherwise you’ll either owe them after completing the Chapter 7 case or you’ll pay them through the Chapter 13 case. But in the meantime the IRS and state are forbidden from collecting the debt. They are also forbidden to take any action directly related to collection, like recording a tax lien against your home or vehicle.

So to be clear, the automatic stay exceptions we’re discussing here do NOT allow the tax authorities to take any action to get your money or assets. The IRS and state tax authority can’t start or continue garnishing your paychecks or bank accounts. They can’t levy on (take away) anything else you own. They can’t call you to pay the tax, and can’t send you tax bills.

The IRS/State CAN. . .

As we said above, the taxing authorities can take certain specific steps to determine how much tax you owe. Some of these steps you wouldn’t expect your bankruptcy filing to affect—they’re probably not surprising. You filing bankruptcy does not prevent the IRS/state from doing the following:

  • Start or finish a tax audit “to determine tax liability.” (See Section 362(b)(9)(A) of the Bankruptcy Code.) But there can be no attempt to collect whatever that tax liability ends up being.
  • Send you a notice about the amount of tax that you owe—a “notice of tax deficiency.” (Section 362(b)(9)(B).) That notice is NOT a demand to pay the tax.
  • Demand that you file your tax returns. (Section 362(b)(9)(C).) In fact this step is often essential for the processing of your bankruptcy case.
  • Make an “assessment” of your taxes and issue a “notice and demand for payment.” (Section 362(b)(9)(D).) “Assessment” is a formal determination of the tax amount. The “demand” here is a term of art meaning that you are put on notice that you are obligated to pay the debt. But whether and when you really owe it usually depends on bankruptcy law.

Conclusion

The interplay between bankruptcy law and tax law can be quite complex. The rule of thumb is that bankruptcy stops tax collection but not tax determination. But your situation may have nuances that could make that rule of thumb misleading. If you are in the midst of, or fear, tax collections, be sure to see an experienced bankruptcy lawyer to find out what would happen in your unique situation. And it really does make sense to do so as early as possible. Tax debts are very much an area where early and wise planning could save you a lot of money.

 

Chapter 7 Permanently Prevents Tax Liens against Your Home

October 16th, 2017 at 7:00 am

Filing a Chapter 7 case prevents tax liens from hitting your home, and so avoids a dischargeable tax from turning into one you must pay. 

 

Our last blog post was about how filing a Chapter 7 case buys you time with debts on your home. It’s worth expanding on one of those Chapter 7 benefits, one that can go way beyond buying time. It could save you a lot of money, potentially many thousands of dollars.

The Dischargeable Income Tax Scenario

Filing a Chapter 7 bankruptcy can discharge certain, usually older, income tax debts. (See our blog post of this last September 22 about the conditions for writing off income taxes in bankruptcy.) If you file a Chapter 7 case before a tax lien is recorded on a dischargeable tax debt, then that will prevent the IRS or state tax authority from recording that lien against your home. The tax will then be discharged (permanently written off) about 4 months of your bankruptcy filing. After that the IRS/state can never record a lien or take any other collection action on the tax. It’s gone forever, and the threat of a lien against your home is also gone forever.

The Very Bad Alternative

What happens instead if the IRS or state records a lien against your home before you file bankruptcy?

Assume you’d have some equity in your home but no more than the homestead exemption. (That’s the amount of equity that’s protected from most creditors in bankruptcy—the specific amount varies state to state.) If you’d owe a tax debt that would qualify for discharge and the IRS/state had recorded a lien on that debt against your home, that lien would continue on after you’d complete your bankruptcy case. Your homestead exemption would not help with a tax lien. That lien would continue to encumber the equity you have in your home. You’d have to pay the lien in full when you’d sell or refinance your home. The lien would effectively turn a debt that you could have discharged within a few months after filing bankruptcy into an anchor attached to your home.

Assume instead that you’d have no equity in your home. The IRS/state would probably still want to keep its lien against your home. The lien would at the time have no equity to encumber but the lien would still attach to your title. Later the IRS/state could likely renew the lien, leaving it on your home’s title for a very long time. Odds are you’d be forced to pay the tax at some point, maybe when your home’s value increased enough. Instead of you getting the benefit of that equity, it would go to pay a tax that you could have discharged long before, if you’d just filed a bankruptcy case before the tax lien hit your home.

An Example

Let’s say you owe $6,000 in income tax for the 2012 tax year and $3,000 for the 2013 tax year. And this is after you’d paid monthly instalment payments for years. Those amounts include a lot of interest and tax penalties. Assume that both of these tax debts qualify for bankruptcy discharge. (This would mostly be because enough time has passed since their tax returns were due and actually submitted.) Assume also that you own a home worth $250,000 with a $225,000 mortgage. That $25,000 of equity is fully covered by your state’s $30,000 homestead exemption.

The following would happen if you filed a Chapter 7 case with your bankruptcy lawyer before any tax lien was recorded:

  • The “automatic stay” from the bankruptcy filing would immediately prevent the IRS/state from recording a tax lien on your home (or on anything else you own). Your home and its equity would be immediately protected.
  • Both the $6,000 2012 tax debt and the $3,000 2013 one would be discharged about 4 months later.
  • The IRS/state could never file a tax lien on these taxes ever again. They could take no further collection action of any sort. The $9,000 debt would be gone. The IRS’s/state’s ability to attach that debt to your home would be gone as well.

Instead the following would happen if the IRS/state HAD recorded tax liens on both years before you filed a Chapter 7 case:

  • The tax lien recorded against your home would continue on after you filed bankruptcy.
  • The IRS/state would get paid on those liens whenever you sold or refinanced your home, potentially many years later.
  • You would very likely pay $9,000—plus likely lots more interest and penalties—to the IRS/state that otherwise you would not have needed to pay.

 

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. 

 

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