In normal times, this would be tax season.

Not this year; these aren’t normal times.

The recent COVID-19 pandemic has already had a significant effect on our personal and professional lives.  Between states and localities implementing “shelter-in-place” orders, commercial activity grinding to a near halt, and the stock market seeing massive losses, the United States has taken a severe economic hit as well as the public health hit.

COVID-19 virus has  also affected tax obligations.   Here’s what to know.

IRS Extends Deadlines 

Filing: The IRS announced on March 21, 2020, that the federal income tax filing due date is automatically extended from April 15, 2020, to July 15, 2020.  See IR-2020-58

Payment: Taxpayers can also defer federal income tax payments due on April 15, 2020, to July 15, 2020, without penalties and interest, regardless of the amount owed.

This deferment applies to all taxpayers, including individuals, trusts and estates, corporations, and other non-corporate tax filers as well as those who pay self-employment tax.  

Procedure: Taxpayers do not need to file any additional forms or call the IRS to qualify for this automatic federal tax filing and payment relief.

Individual taxpayers who need extra 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.

Refunds

The IRS expects to continue to monitor issues related to the COVID-19 virus, and updated information will be posted on a special coronavirus page on IRS.gov.

Ways to Pay  The IRS 

IRS Direct

The IRS  offers the ability to make electronic payments online.

Therefore, the days of manually writing a check and mailing it to the taxing agency via certified mail make little sense, given that secure options exist for electronic payments.  Manual checks can be lost in the mail, stolen, or incorrectly posted to the wrong tax period.

For the IRS, individual taxpayers can make an electronic payment online through Direct Pay with a bank account.  See the following link:  .  An individual taxpayer may use this service to pay Form 1040 taxes, estimated taxes, or other associated forms directly from your checking or savings account at no cost.

Also, the website allows a taxpayer to track payment by signing up for email notifications.

One drawback with Direct Pay is that not all tax liabilities can be paid using Direct Pay.  The IRS has a helpful lookup table online to determine whether a balance owed to the IRS can be paid using Direct Pay.

If payment cannot be made using Direct Pay, a taxpayer must use the federal government’s Electronic Federal Tax Payment System, also known as EFTPS, which is discussed below.

Electronic Federal Tax Payment System 

The best option for businesses or large payments is through the Electronic Federal Tax Payment System (EFTPS), a free service from the U.S. Department of the Treasury.

A taxpayer must enroll online to get started, and in seven business days, a Personal Identification Number (PIN) will be mailed to the taxpayer’s contact address.  Upon receipt of a PIN, a taxpayer can make payments and check payment history.

A potential drawback with EFTPS is that a taxpayer must wait to receive a PIN before making a payment, but once enrolled, the process is relatively straight forward and secure.  Like Direct Pay, a taxpayer can obtain a receipt and track payment.

Why filing deadlines matter

Taxpayers should always file their tax return on or before the due date and confirm with their tax return preparer that the return was timely filed.

This means obtaining a copy of the electronic receipt that the return preparer received after filing the return.

Many taxpayers fail to do this and assume that the accountant timely filed the return.  If, however, for some unexpected reason, the return was not timely filed (e.g., the return prepare mistakenly failed to transmit the return or the transmission did not go through), it may be difficult to avoid a late-filing penalty, even if the taxpayer relied upon the accountant to timely file the return.

There are separate penalties for failing to file AND for failing to pay.  Regardless of your current ability to pay, file the return and limit the penalties.

If you can’t pay

Given the unprecedented times, some taxpayers may simply lack the financial means to pay the taxes reported on the return by the due date.

There are options available for taxpayers in this situation, but the most crucial advice is to timely file the tax return by the due date to avoid the late filing penalty.

Once the return is timely filed, a taxpayer can choose a collection alternative, such as an installment agreement, offer in compromise, or currently not collectible status (financial hardship).

Other options may also exist, such as penalty relief, innocent spouse relief, and bankruptcy.  Taxpayers facing collection issues should retain competent tax counsel, who can review the facts of their case, explain the options, and formulate a workable strategy.

Coming soon

Changes to California state income tax deadlines

How to avoid the pain of tax penalties

Guest contributor San Jose attorney Steven L. Walker advises clients on tax controversies and litigation with the IRS, the FTB, and state & local taxing agencies. His clients bring him civil and criminal tax matters, including tax audits and appeals, litigation in U.S. Tax Court and federal district court, tax fraud, offshore/foreign tax compliance, and tax collection. He also advises clients on business matters.
Steven is an adjunct professor at the University of San Francisco School of Law in the LLM (Taxation) program, where he teaches Civil and Criminal Tax Penalties, and Bankruptcy Taxation. He is also a Fellow of the American College of Tax Counsel and a former IRS attorney with additional experience at the FTB Legal Division.  www.walk-law.com.

Lots of my clients lately are asking the same question:  why has my mortgage payment increased so much?

Interest rates are creeping up on variable rate loans, but not dramatically.

For most of those asking, it’s because the interest-only period of their home loan has run.

Borrowers forgot that lots of loans were written 10 years ago that promised low initial payments of interest only.

While it wasn’t a free ride,  it was cheaper than a fully amortized, 30 year loan.

Appealing, and the interest-only feature probably allowed borrowers to believe that they could afford the house they were buying.

But, time’s up on many of these loans.

And math tells us that when 10 years have passed and the remaining life of the loan is 20 years, it will take larger monthly payments to retire the amount borrowed.

Understanding your loan

The easiest way to see if the loan terms explains the payment increase is to pull out the promissory note.

Many of these notes have some description of unusual terms on the first page of the note, right under the heading “NOTE”.

It may say explicitly, “10 year interest only” or “interest fixed” or “variable interest”.  All of those are among the products peddled before the Great Recession.

The note should tell you when the “change date” on the loan is, and if variable, what index is used as a base for the interest rate calculation.

If you can’t find your note, you can ask the servicer for a copy using a Request for Information under RESPA.  Here’s a how-to for making a request.

Alternatively, you can ask your questions about loan terms directly from the servicer, again, using a Request for Information.

There’s no charge to make such a request, but the timeline for getting an answer can be as much as 30 business days.

If you can’t make the increased payment

If the increased payment is unmanageable, consider seeking a loan modification from the existing lender.

An alternative is to see what your options are to refinance the loan with a new lender, a new loan, and another 30 years to pay.

Be proactive.  The further behind you get on the existing loan, the less attractive you are as a borrower on a new loan.

The commentator who equated debt problems with irresponsibility nearly caused me to melt down, right in my office.

Irresponsibility, he said!

The idea that people who find themselves with bills they can’t pay got in that mess through flighty behavior  or self absorption is sooooo wrong.

Mindless spending is seldom the cause of bankruptcy in my experience.  Occasionally, yes;  routinely, no.

The need for bankruptcy is more often tied to

• Job loss
• Ill health
• Business failure
• Supporting multiple generations of family
• Divorce

Credit card balances  are usually tied to basic living expenses, recent studies show.

The gig economy hasn’t helped.  Without employee benefits and regular work hours, workers find themselves responsible for providing insurance, tax withholding and without sick days or retirement plans.  And gig earnings seldom cut it for very long in the Bay Area.

The real cause of bankruptcy

In fact, I see people in my bankruptcy office because they followed the time-honored advice we give to each other.

They bought a house.

They started a business.

They cared for their extended family.

They robbed Peter to pay Paul rather than renege on their debts.

And, at some point, it all caught up with them.

Often, the problem looks like a tax problem and it’s IRS collection action that brings them to bankruptcy.

But the more likely cause is the fact they reduced their tax withholding to create cash to meet other obligations.  Or they paid their employees with “net checks” and didn’t pay over the employee’s tax withholding in order to nurse the business along a bit more.

Or, they are supporting  both adult, underemployed children and aged parents.

Then there’s the curse of home ownership.  During the Great Recession, created by manic buying of homes made possible by toxic loans, I often advocated for letting the house go as being an impossible financial burden.

But 10 years later, with home prices recovered and then some, I’m starting to see the up side of struggling to keep a home.

Rents are increasing as fast as home prices:  let the house go and you’ll pay nearly as much in rent, get none of the tax advantages of home ownership, and have no protection against continuing increases in rent.

Renters are even more vulnerable than those with overly costly homes.

It’s complicated

It’s cliche, but it’s true.

Every story is a bit different, but from where I sit, too many of us are just plain lucky that our economic fragility hasn’t caught up with us.

More

Debt settlement is a fraud

The three times when bankruptcy is justified

Credit heals

Each of them is a lien, but all liens are not the same in bankruptcy.

And the difference between them drives how you can reduce or eliminate the lien.

A lien gives the creditor holding the lien an interest in the debtor’s property, real or personal.  Ordinarily, the lien must be paid off before any of the value in the collateral goes to the owner of the property.

Liens come in three varieties:  voluntary, judicial, and statutory.

While you’re stuck with some liens, some can be whittled down to size, and some can be eliminated altogether when you file bankruptcy.

First, we’ve got to know which kind of lien we’re dealing with.

Voluntary liens

Voluntary liens are ones that you agree to create in favor of a creditor.  A mortgage is a classic example, as is the lender’s lien on your car.

In business, a lender often insists on a lien on business assets to secure repayment of a loan.  The lien puts the lender ahead of other creditors in the fight to be paid.

Judicial liens

Judicial liens are, not surprisingly, created by judges.  They result from court judgments or orders creating temporary liens during the course of a lawsuit.

State law determines whether a judgment automatically becomes a judicial lien.  In California, the winning party must take an additional step of recording an abstract of judgment to create a lien on real estate in that county.

Statutory liens

Statutory liens are created by law.  Tax liens are ones we encounter most frequently.

Provisions of the tax statutes say that unpaid taxes become a lien on all the taxpayer’s assets.

Bankruptcy changes the rules

A cornerstone proposition in bankruptcy law says that a lien is only a “secured claim” to the extent that there is value in the asset for the lien to attach to.

A creditor may have a lien with a face value of $100,000.  But if the property it attaches to had only $15,000 of available equity, the lien holder has a secured claim for $15,000 and an unsecured claim for $85,000.

Another cornerstone of bankruptcy law says that, without additional proceedings in bankruptcy court, liens survive bankruptcy as a charge on the property they attach to.

So, we really want to know which liens are vulnerable to being voided or whittled down by a proceeding in bankruptcy and in which chapter of bankruptcy those proceedings can be brought.

Judicial liens lose to exemptions

In any chapter of bankruptcy, the debtor can avoid (invalidate) a judicial lien that impairs an exemption to which the debtor is entitled.  11 USC 522(f).

Depending on the numbers, the lien can be eliminated altogether if there is not enough value in the asset to pay the exemption and have anything left for the lien.  Or, the judicial lien may be reduced as required so there is value to fund the exemption.

This works only for judicial liens.  Exemptions don’t protect assets from voluntary or statutory liens.

Chapter 13 smites worthless liens

Lienholders are at risk in Chapter 13, where the debtor is reorganizing his financial affairs.

Liens that aren’t secured claims ( that is, that don’t attach to value equal to the lien) can be voided at the completion of the payment plan.

With two exceptions, even voluntary liens, which are usually beyond altering, can be stripped down to collateral value.  The exceptions are

• voluntary liens on a principal residence where the lien attaches to some value, and
• purchase money liens created within 910 days of a bankruptcy filing to buy a vehicle.

In all other situations, a lien is worth only the value of the collateral that secures it.

So, huge tax liens get cut down to the value of the available collateral, and wiped out at plan’s end.  Totally unsecured deeds of trust or mortgages can be avoided.

You gotta appreciate the power of Chapter 13.

More

How Chapter 13 works

Understand tax liens in bankruptcy

Cutting the car loan down to size