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Tax Liens Live On After Bankruptcy, Unless….

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Tax Problems

You mean the tax liens won’t  go away when I get a bankruptcy discharge?

The client was startled that the lien would live on beyond his bankruptcy.

So, if all my debt doesn’t go away, what do I get from the bankruptcy discharge?  he asked.

I thought the tax debt went away when I filed.

It’s your personal liability that is wiped out when you get a bankruptcy discharge.

Liens live on.

What’s personal liability for debt

In a nut shell, personal liability is the right of your creditor to use the powers of the law to reach your wages and your assets to satisfy a  debt.

When you get a bankruptcy discharge, that personal liability is erased.  The discharged creditors can’t reach assets that you acquire after the bankruptcy, nor the assets that you exempted in your bankruptcy case.

So, get a bankruptcy discharge that wipes out older taxes and the IRS can’t garnish your future wages or  levy your bank accounts.  Further, the existing tax lien won’t attach to assets you acquire in the future.

Tax liens  on current assets

But liens, which are rights that others have in your property, survive a Chapter 7  bankruptcy.  Your property doesn’t necessarily get a discharge when you do.

 Stripping tax liens in Chapter 13

By “property”, we mean personal property and real estate.  A properly perfected tax lien attaches to all your personal property and to real estate in the county where it’s recorded.

The critical question is:  what is that tax lien worth?  Does it really attach to anything of value?

Or is it just a big number hanging out there, unrelated to the value of what you own?

Tax liens after bankruptcy

In my client’s case, the tax obligation bordered on a million dollars, nine years later.  But the value of his assets was negligible.

So, the million dollar tax lien attached to an older car, a few dollars in the bank, and the shares of a business that would be worthless if he were to leave the business.

What does that tax lien really mean to his post bankruptcy life?  Not much.

The IRS does not want his old car or worthless stock.  It certainly doesn’t care about his household goods or dirty socks.  It would cost far more than these things are worth to conduct a tax sale.

He’s safe running the business and washing the socks, because the IRS won’t be there to take them.

Choices for dealing with tax liens post bankruptcy

What you do about the tax liens that live on after your bankruptcy depends on what they’ve attached to and what your financial life looks like, post bankruptcy.

The first thing to know is that tax liens, unlike diamonds, are not forever.  The lien expires when the statute of limitations under non bankruptcy law runs on the tax year that triggered the lien.

The general statute of limitations on federal taxes is 10 years from the date the tax was assessed.  Assessment usually occurs when you file the return and the return is processed by the IRS.

Thus, it’s the date the taxes were assessed, not the date the lien was recorded that is important.

Many people simply do nothing about tax liens that survive the bankruptcy.  They rely on the passage of time and the relative low worth of the liened assets to keep them out of the IRS crosshairs until the lien dies of old age.

If getting the tax lien off the public record, or off of a property that has some value that the tax lien reaches, you can approach the IRS with an offer to pay something for the release of the lien.

Typically, if you get a release of the lien, it will be up to you to record it in the public record.  The IRS will give you the document you need, but you have to actually record it.

So, while the tax lien may live on, it probably has little impact on your life after bankruptcy.

Or, you can file Chapter 13, where the liens are cut down to match the actual value to which they attach.  The secured portion gets paid over the life of the Chapter 13, and the lien is voided at the end of the plan.

Chapter 13 as a tax tool

Image: © freshidea – Fotolia.com

 

4 Compelling Reasons To File The Tax Return Even If You Can’t Pay

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Should you file the tax return if you can’t pay the tax?

You got to the bottom of your tax return and the amount you owe is bigger than your checkbook balance.

  • Scared of filing the return for fear of immediate collection action?
  • Scared of even calculating how much you owe?  think an extension of time to file looks good?
  • Fearful that you’ll be hanging a sign around your neck:  squeeze this guy?

Nope.  It doesn’t work that way.

The IRS does not start harassing nonpayers for money on April 16th.  Or even September 16th.  They haven’t even posted the returns that have been filed by then.

Relax, breathe deeply, and file the return.

There are far more advantages to getting the return on file than risks in admitting you owe money you can’t pay.

Easy tax payment plans available

If you can’t pay the full amount of the tax owed, send a partial payment with your return.  Reduce  your debt to the tax folks as much as you can.

Nothing requires that you enter into an installment agreement for payment.  Simply send money regularly toward retiring the tax.

Put your name, social security number and the tax year you want the money credited to on the check.

If you feel the need for a formal payment agreement with the feds, you can set up a payment plan, online, if you owe less than $50,000.

Separate penalties for failure to file

If you fail to file a tax return and don’t get an extension, you expose yourself to a separate penalty for failure to file the return.

That’s on top of the penalty for failure to pay as required.

So, it’s expensive to try to drop out of sight.

Filing returns start clock ticking on escape options

Taxes don’t live forever.

There’s a collection statute of limitations that makes taxes uncollectable.  Bankruptcy laws permit the discharge of taxes of a certain age long before they expire of old age.

But both escape routes for delinquent taxes start counting from the filing of your tax return.  (More precisely, the statute of limitations starts from assessment, but filing the return is a self assessment).

Last year’s figures drive this year’s withholding

The most important reason to prepare last year’s tax return now is to get your withholding right for the current year.

Extensions to file are seductive, but dangerous.  It delays adjusting your withholding long into the current tax year to match your actual tax liability.  You don’t want to be in the hole again, do you?,

If you put off calculating just how much you owe for last year til October, you have only a few months before next April to get this year’s taxes paid in.

Closing your eyes to an underwithholding problem won’t make it go away.

Calculate what you owe, make a plan to pay it if possible, and fix your withholding or quarterly payments so you’re OK next year.

More

Tax on cancelled debt

Tackling tax liens in Chapter 13

Stop making quarterly tax payments

Tax Tips & Tidbits

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Tax filing deadline approaches, so I thought we’d gather up tax tips and little known tax strategies, especially useful if you’ve filed bankruptcy.

The Tax Deduction No One Tells You Aboutfan of bills

If you are paying mortgage interest, state taxes, back support, or business debt through a Chapter 13 plan, those payments made by the trustee may be deductible to you.  Just because the trustee cuts the check, doesn’t mean you aren’t the payor.

insolvent for tax purposesEscape Tax On Settled Debt

Proving to the IRS that you are insolvent is one way out of paying taxes on the canceled debt.  But watch out, the IRS’s definition of insolvent is different from most.

5930176734_380196d14c_zTax Software Makes A Lousy Purchase, When It Can Be Free

The IRS provides free, commercial tax prep software for those with an income of $62,000 or less.  And they partner with volunteers to provide free help with returns through VITA.

credit-squeeze-transparentHow To Escape The Flat Wrong 1099

You’ve got challenges when the creditor sends you a dead wrong 1099.  The IRS got the same, erroneous info.  What to do to avoid the tax consequence of someone’s mistake.

Tax Myth Saddles You WIth Tax ForeverShould You File The Return If You Can’t Pay The Tax

It’s a myth that filing a timely return without a check to pay the tax you owe makes you instantly exposed to collection.  Instead, here are four reasons to file the return whether or not you can pay right now.

?????Don’t Let The Tax Scammers Catch You

Stolen identities and stolen tax refunds are just two of the consequences of falling for the fake call from the “IRS”.  Here’s what to watch for to stay safe during tax season.

Spill the beans concept.The One Person You Must Tell That You Filed Bankruptcy

Hiding your bankruptcy discharge from your tax preparer can be an expensive mistake.  The bankruptcy discharge trumps (if we can still use the word) the tax on canceled debt.

chained businessman on white backgroundDitch The Tax Debt In Bankruptcy

You can get rid of tax debt in bankruptcy.  Walk through the rules that control when a tax is dischargeable without payment.  Also, help filing a return when you have no records.

More tax tips on Income Taxes in Bankruptcy on our sister site.

Free Tax Preparation Offered In Bay Area

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Households with an annual income of $54,000 or less can have their tax returns prepared for free through the Bay Area United Way’s Earn It, Keep It, Save It program.

Earned Income Tax Credit

The Earn It, Keep It, Save It campaign is particularly focused on enabling qualifying individuals and families to access this tax credit that stands to put real money in the pockets of working families.

Too many families miss claiming the EITC.  Something like 20% of the families that are eligible fail to take advantage of this support for low and moderate income folks.

Even if you owe no taxes, you can claim the tax credit and receive a check.

Generally, the lower your income and the more children you have, the larger the payment you’re entitled to.

Low income families need tax help

Too many Californians – far too many here in the Bay Area – work hard yet find themselves unable to meet their most basic needs. Furthermore, tax season can be stressful time for many people, as they round up tax documents and receipts, and make sense of confusing tax forms. Those of us who can afford it may pay for tax software that walks us through the process, or we may pay a tax preparer to file on our behalf. But the cost for paid preparers can be costly, and tax software varies widely in price. For low-income families who may not be able to afford these services, tax time can be a significant source of stress, and securing a full refund is not assured. Additionally, many of these families face additional challenges in doing their own taxes –English may not be their primary language or they may have limited computer skills. This is why EKS is so important in our community.

Get help with your taxes.

California puts money in pockets, too

California has a state version of the Earned Income Tax Credit.  The California rules are set out in this fact sheet from the Franchise Tax Board.

Tax Deductions Hidden In Chapter 13

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taxes

Don’t miss the tax deductions hiding in your Chapter 13 plan payments.

The same, very important debts that your Chapter 13 plan pays are often tax deductible.

And you are still the person who’s paying, even if the trustee writes the check.

Deductions in bankruptcy

Let’s look at some common deductions lurking in the Chapter 13 disbursements.

Mortgage interest  If your Chapter 13 plan is catching up on delinquent mortgage payments, the claim of the lender is probably mostly interest.

Taxes  Property taxes paid through the plan should be deductible.  Likewise, state income taxes paid by the trustee are deductible.

 Business expenses  If you operate a business in Chapter 13 or operated one before you filed, you may be paying business leases, sales taxes, or vendor debt through the plan.

Get the info you need

In my experience, you have to dig out the information on deductible payments;  I have not seen lenders sending 1098’s reporting mortgage interest paid to debtors when the checks come from the trustee.

Step by step to claiming the mortgage interest deduction

But most if not all Chapter 13 trustees are on the web, and debtors can access the trustees reports of which creditors have been paid this year.

Pull up the report of last year’s disbursements and flag the payments that are deductible.

Save the printout of the trustee’s report in case of question  by the taxing authority.  The IRS will not have gotten a matching report from the lender who got the money and hasn’t reported it to you and the IRS.

How to treat 1099’s on foreclosures and short sales

Go back to prior tax years

If your plan is paying deductible expenses and you’ve been in the bankruptcy case for several years, you may want to look at prior year trustee reports.  Overlooked deductions might justify going back to amend a prior return.

Tax returns are generally amendable for three years.

Check it out

Take this post with a grain of salt, or rather, take it to a tax professional.

I am a bankruptcy lawyer and what I know about taxes, I’ve learned on the job.  But I am convinced that Chapter 13 debtors are missing legitimate tax deductions by overlooking what the Chapter 13 trustee has paid on their behalf.

More

How to find the mortgage interest paid by Chapter 13 trustee

What your tax professional should know about tax and bankruptcy

When your Chapter 13 plan struggles

Image courtesy of 401(k)calculator.org

Pay No Tax On Discharged Debt

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1099 tax

When it’s tax time,  questions about forgiveness-of-debt income are everywhere.

Questions start when you receive a Form 1099 from a creditor.

But for my bankruptcy clients, the answer is simple:

Debt discharged in bankruptcy is not taxable.

Tax on cancelled debt

Debt may get cancelled in lots of ways:

  • in a short sale;
  • by compromising a debt
  • by lender compliance with a settlement agreement with the feds;
  • in a bankruptcy; or
  • in a foreclosure.

Lenders and debt collectors believe themselves bound to send out a 1099 whenever they handle a transaction that may implicate cancellation of debt.   They aren’t rendering an opinion on the tax treatment of the event.  They are just reporting it to the IRS.

Receipt of a 1099 is not the final word on the topic; it’s only notice that the transaction in question has been reported to the IRS.

Bankruptcy is an exception

The standard rule is that debt that is cancelled is treated as though you had received that much cash, and that pseudo-cash is treated as income.  And, if it’s income, the IRS thinks it’s taxable.

The exceptions to recognizing that transaction as income  found in IRC 108 include

  • insolvency at the time, and
  • discharge of the debt in bankruptcy.

Claiming the exception

To avoid including the total on a 1099, you can’t count on the IRS knowing about your bankruptcy discharge.

You have to file an IRS form to rebut the 1099.  It’s form 982 and right at the top are the boxes to check to invoke the exceptions.

The form also includes a worksheet to see if you are insolvent for the purposes of this provision of law.

If the 1099 got the facts wrong

Remember, too, that if you did not have personal liability for the debt, the cancellation of that debt is not even forgiven debt.  There was no debt.

You may have no personal liability because of a previous bankruptcy or by reason of California’s anti deficiency laws.

Also, there is special legislation dealing with cancellation of debt upon loss of a primary residence, excluding phantom income from qualifying transactions.

Here’s the IRS on the subject:  http://www.irs.gov/taxtopics/tc431.html

More

Deductions hidden in Chapter 13

File even if you can’t pay

Discharging taxes in bankruptcy

Bail Yourself Out Of Payroll Tax Trouble

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parachute-851318_640 (1)

Business owners with unpaid payroll taxes are in deep trouble.

Even if the employer is a corporation, the corporation’s managers are personally liable for the trust fund portion of unpaid payroll taxes. There’s no corporate shield when it comes to payroll taxes.

The trust fund portion of the tax (the amount withheld from employees’ checks) can be assessed against anyone  who could have paid that money  to the IRS.

You are in the IRS’s cross hairs, personally, if the business hands out “net” checks to employees without sending the withheld money in.  A bankruptcy discharge is no help here.

What’s the payroll tax

What we refer to as “payroll tax” is really a combination of two elements:  the employee’s income and FICA taxes that the employer has withheld and the employer’s share of FICA  (Social Security) tax.

The portion of the “payroll tax” withheld from the employee’s check are the “trust fund” portion of the payroll tax. Usually, trust funds make up about 2/3rds of the payroll tax.  The balance is the business’s matching contribution to Social Security.

The liability of corporate officers or LLC managers for the business’s trust fund liability is not dischargeable in bankruptcy.  Like other federal taxes, the statute of limitations is 10 years and the IRS is a fearsome creditor.

Earmark tax payments

If you find yourself in this pickle, you, and the business itself, can bail yourself out of trouble with an earmark of any payment you make toward Form 941 liability.

A taxpayer  who makes voluntary payments to the IRS has the right to designate to which liability the payment will be applied.  In re Ribs-R-Us, Inc., 828 F.2d 199, 201 (3rd Cir. 1987).

Cooper-AZ-brand-cropped

An earmark allows the IRS to distinguish your payment from others, like a cropped ear lets a cattleman tell his cows from his neighbors.

It is simply a direction to the IRS as to how the payment is to be credited.  Pay voluntarily and you have the right to tell the IRS what to do with the money.

Without instructions, the IRS is free to apply payment it receives on the tax debt as it chooses.  And it chooses the manner of application that benefits it best.

Send a check for payroll taxes and if the check is not enough to pay the entire liability, the IRS applies it first to the dischargeable portion of the tax first, preserving the personal liability of the business owners for the remaining tax.

Likewise, if the IRS levies an account, they may apply the levied funds as they wish.

How to earmark

If the business finds itself with insufficient funds to pay the entire tax owed, you can reduce your personal liability for the unpaid tax by earmarking the payment.

Write directions on the check specifying how the payment is to be applied like this:  Trust Fund liability, 4th Quarter 2015 941.  Send a cover letter with the check with the same instructions.  Keep a copy of the letter for your records.

Of course, the better course of action is to remain current on payroll taxes.

Use a payroll service that won’t cut the checks unless the taxes are paid, or make a tax  deposit  with each payroll.

Dip into the money withheld from employees and you’ve taken a “loan” that lives very nearly forever.

More

The easiest business loan in town-not

Is it safe to file a corporate bankruptcy

Reorganize or wind down?

Bankruptcy Discharge Slays IRS Form 1099

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In a duel between a tax Form 1099 and a bankruptcy discharge, bankruptcy wins every time.

The prize?  no tax on debt discharged in bankruptcy.

So, if you’ve already gotten your discharge, the creditor’s 1099, with your social security number on it, is no threat.

But you do need to file another form to secure the prize.

Bankruptcy is exception to tax

Normally, when an obligation is forgiven, the tax code treats the amount of forgiveness as if it were income.  And income is exposed to tax.

Insolvency is another exception to tax on forgiven debt

But forgiveness in bankruptcy in the first exception to the rule.

Debt forgiven in bankruptcy is not treated as income.

Creditor is clueless

So, if bankruptcy is outside the IRS rule, why are you getting a form 1099?

Because there’s another rule, requiring creditors to report to the IRS, just the way your employer is required to send the IRS your W-2.

And seemingly, the creditor can’t figure out that the reason its claim is worthless is because of the bankruptcy discharge.  So it’s easier for the creditor to just send out Form 1099, and make it your problem.

Fixing the 1099 problem

The solution is simple:  file IRS form 982.

Title 11 is the part of the United States Code on bankruptcy.  Cases are filed under different chapters of that title

Form 982 is your rebuttal to the report that you have taxable income because your debt was forgiven.  Check the very first box on the form claiming the bankruptcy exception.

This debt is excluded from income because of  Discharge of indebtedness in a title 11 case 

The IRS provides a set of instructions for filing  your “get out of tax” form.  Form  982 Instructions.

Other tax consequences of discharge

If you have real property, you may have to reduce your basis in assets by the amount of debt discharged in your bankruptcy.

But thankfully, there is an exception to this rule too:  no reduction in basis is required with respect to your principal residence claimed exempt in your bankruptcy case.  IRC 1017(c).

Tax action plan

So there you have the skinny on form 1099 and your bankruptcy discharge.

Bankruptcy has other tax implications:

Taxes dischargeable in bankruptcy

Unfiled tax years are never dischargeable

Chapter 13 gets an interest-free tax repayment plan

Your accountant needs to know about your bankruptcy

What to do with a flat-wrong 1099

How To Wipe Out Tax Penalties In Bankruptcy

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217/365 August 5 - Found MoneyTax penalties seem like a further insult when you’re having trouble paying the tax itself.

Everything seems subject to an additional penalty:  failure to file timely;  failure to pre pay sufficiently;  failure to be accurate.

They mount up quickly, often equaling the unpaid tax.

Bankruptcy can not only eliminate your liability for certain taxes, it can wipe out the tax penalties as well.

Here’s how it works.

Three rules for discharging tax penalties

Penalties for dischargeable taxes are dischargeable

Tax penalties are tied to a particular tax year.  If the tax for that year is dischargeable in bankruptcy, the discharge wipes out the penalties too.

The formula for a dischargeable tax, roughly speaking, says you can get rid of an unsecured tax if  1) the return for that year was due more than three years before the bankruptcy was filed;  2) if the return wasn’t filed on time, it’s been on file for at least two years; and 3) the tax for that year was assessed at least 240 days before bankruptcy.

Discharge the tax, discharge the penalty.

Penalties tied to events more than three years before filing are dischargeable

If the failure that triggered the penalty happened more than three years before filing, the penalty is dischargeable.

It’s dischargeable even if the the tax for that year isn’t dischargeable, for instance, because the returns weren’t filed on time. see 11 U.S.C. 523(a)(7).

All tax penalties wiped out in Chapter 13

That’s right:  all tax penalties are discharged by a Chapter 13 discharge.  Hard to beat, right?

Chapter 13 requires that you pay in full the priority taxes and the interest that accrued up to the date the bankruptcy case was filed.  But at the end of the case, all tax penalties are wiped out, even on the priority taxes.  More on taxes in Chapter 13.

Fraught with rules

So much of discharging taxes depends on knowing the maze of rules that apply to taxes in bankruptcy.  It’s critical to get a tax transcript to verify the dates of all the important transactions.

Get experienced legal help if you want to discharge taxes and tax penalties.  This is not the time or place for the cheapest or closest bankruptcy lawyer in town.

Image courtesy Flickr and Sharon Drummond

Discharge Taxes in Bankruptcy: Move Beyond the Myth

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bankruptcy taxes

Myths about taxes in bankruptcy are as common as myths about fire breathing dragons. 

Central to the bankruptcy tax myth is the claim that taxes can’t be discharged in bankruptcy.

Not so.  Bankruptcy can wipe out many kinds of taxes.  And that discharge can restore order to a family’s economy.

Which ones are dischargeable?  Let’s see.

Income taxes can be discharged

Three rules must be met to discharge income taxes.

  • The return for the year in question was last due without penalty more than 3 years before the bankruptcy is filed.
  • The return has been on file for at least two years.
  • Any additional assessment of tax was made more than 240 days before filing.

Essentially, the most recent tax liabilities are protected from discharge. File the return and wait long enough, and a bankruptcy discharge will eliminate your liability for the tax.

In bankruptcy lingo, income taxes where the return was due less than 3 years before the bankruptcy filing are “priority taxes”.

Priority taxes are paid ahead of many other kinds of creditors in cases where a dividend will be paid to creditors in a bankruptcy case.

It’s important to note that you start counting the three years when the return was due, including extensions. Not from when it was actually filed, and not from the end of the calendar year.

Penalties can be discharged

If the tax is dischargeable, any penalty tied to that tax is also dischargeable.

This is important since the penalties can often equal the tax that is unpaid, creating an impossible sum to repay.

The rule is more generous in Chapter 13: all unsecured penalties are dischargeable and penalties don’t have a priority for payment.

Filed return is required

The unstated requirement for discharging taxes is the filing of a return. Bankruptcy law provides no relief for those who neglect their obligation to file.

If a return wasn’t filed when due, then it must be on file for two years before the tax can be discharged.

Don’t think that you can “let the IRS file the return for you”. Unfortunately, that’s another myth. A “substitute for return”, prepared by the IRS when you don’t file a return simply isn’t treated as a “return” for bankruptcy purposes.

No return, no discharge of that year’s taxes.

Recently assessed taxes survive bankruptcy

The final rule for determining whether a tax is dischargeable looks at whether the tax was assessed within 240 days of filing. Taxes assessed within that period don’t get wiped out in bankruptcy.

Pinning down the precise date of recent assessments make it important to get a tax transcript from the IRS. That transcript will show the history on each year for which there are unpaid taxes.

Three rules for discharging taxes

So there you have the three broad rules that govern the discharge of income taxes in bankruptcy. This is the law, so things aren’t always as simple as these rules promise. The rule do cover most of the tax and bankruptcy situations involving income taxes.

If old taxes are a problem, get an experienced bankruptcy attorney to assess whether bankruptcy will get you out from under tax debt.

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Redwood City, CA 94063
Phone: (650) 694-4700

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