Tackling Tax Problems in Bankruptcy

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In my bankruptcy practice I regularly see people who owe taxes dating back years or even decades. Sometimes they avoid facing the problem simply by ceasing to file yearly tax returns. Ignoring the problem, of course, only makes it more difficult to manage. Here are three (3) steps I follow to tackle even the most difficult tax problems.

  1. File the returns. If necessary, help the client file original tax returns for the tax years at issue. An independent tax professional can ensure accuracy and objectivity. I have found that clients who prepare their own returns can be their own worst enemy.
  2. Understand how my client got into this situation. Sometimes it is under-withholding from payroll, or failure to remit estimated taxes. We address the underlying issue so the problem does not repeat itself.
  1. Devise a strategy to handle the problem. Obtain an account transcript from the IRS for each tax year in question. As of January of 2014 you no longer need a Power of Attorney to obtain tax transcripts. The IRS now permits individuals to obtain transcripts instantly and free at http://www.irs.gov/Individuals/Get-Transcript. Once an account is created there are a number of steps to verify identity and prevent misuse. This means that clients must either access the site themselves, or be present while I enroll in the service with their information.

The transcripts reflect the critical dates to which the tolling and discharge rules apply. I use a tool found at www.TaxDischargeDeterminator.com for analyzing the various codes and dates on the transcripts. Once we have reviewed all the information we evaluate the client’s options for dischargeability of the taxes owed.

Option 1: Wait to file Chapter 7 or Chapter 13 or to let the 10-year statute of limitations expire. Let tax debts age, either beyond the 10-year statute of limitation (subject to tolling) or until they meet the requirements to be discharged (subject also to tolling). In either event, we can work with IRS’ collection division to work out a minimal monthly installment agreement for the tax debts until either the time is right to file BK or the statute has expired.

Option 2: File a bankruptcy immediately or in the near future. If we choose to file chapter 13, my client repays the priority or secured tax debt and will discharge unsecured taxes. Priority taxes and penalties may be paid over up to sixty (60) months in Chapter 13, generally without post-petition penalties and interest (if not fully secured), or with interest (if fully secured) or where a co-debtor is also liable. The “older” (non-priority) taxes will be discharged the same as other general unsecured debts. In Chapter 7, the priority taxes will survive but the non-priority taxes will be discharged.

Finally, remember that for purposes of calculating debt limits in Chapter 13 tax debts are NOT consumer debts.

Roderick Martin has more than two decades experience in Georgia bankruptcy courts. For more information, visit his office at www.cutdebt.com, or call 770.427.5853.

For assistance with tax problems “nationwide”, contact Florida tax and bankruptcy attorney Larry Heinkel at either Larry@TaxProblemSolver.com or 727.894.2099.