Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

Cut Tax Penalties In Bankruptcy

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Get in tax trouble and the penalties often grow huge.

What starts as a manageable problem can soon tower over you.

Breathe deep;  there is a solution.

Chapter 13 bankruptcy can cut tax penalties down to size.

All tax penalties discharged in 13

Old or new, large or small, Chapter 13 discharges all unsecured tax penalties.

In contrast, Chapter 7 discharges some tax penalties.

 Discharged are penalties for taxes that are themselves dischargeable.

Also dischargeable in Chapter 7 are penalties where the transaction or event that triggered the tax occurred more than three years before filing, whether or not the tax itself is dischargeable.  523(a)(7)(B).

That’s good, but if you are eligible, Chapter 13 is better.  All penalties are discharged.

Who can file Chapter 13

Chapter 13 is available to individuals (no corporations or LLC’s), with regular income, whose debts total less than the caps for secured and unsecured claims.

You know if you are a real person and whether you have regular income, so the thing that needs analysis is the allocation of your debts between those that are unsecured (the creditor has no lien on your assets) versus the debts for which there is a lien.

To be a secured claim in bankruptcy, that lien has to attach to an asset that has market value greater than any liens senior to it.

Tax liens don’t go to the head of the line just because they are debts owed to the government.  They fall in line behind any other lien holder who perfected their lien before.

Recent taxes must be paid

Chapter 13 plans are written by the person who has filed the bankruptcy case.  The Bankruptcy Code requires, however, that recent income taxes be paid in full through the plan.

Note that it is the TAX and the INTEREST on that tax that have to be paid during the life of the Chapter 13.

Penalties get treated just like personal loans, medical bills, and credit card debt:  what that class of creditors gets in the Chapter 13 is driven by the means test and the best interests of creditors test.   In most Chapter 13 plans, that’s little, or nothing.

Chapter 13 cuts those penalties down to size.

Tax liens whittled down

toothpicks-pixabay_optThe discussion above deals with unsecured taxes and tax penalties.  The rules change when a tax lien is filed.

At its simplest, a Chapter 7 discharge eliminates the IRS’s ability to levy your bank account or garnish your wages for taxes that have been discharged.

However, the Chapter 7 discharge doesn’t alter any tax lien recorded before the bankruptcy, even if the taxes themselves are discharged.

If the tax liability is discharged, any lien in place will not attach to assets you acquire after your bankruptcy is filed.

More about tax liens after bankruptcy

Chapter 13 does alter tax liens.  (See why I’m a fan of 13?)

Chapter 13 treats as a secured claim only that part of a lien that attaches to real value in the taxpayer’s assets.

Put bluntly, if you don’t have any assets, then the lien is worthless and will be voided at the conclusion of your Chapter 13 plan.

Oh, technically,  the tax lien may attach to your household goods, all right.  But those things have very little market value.

Pay the resale value of your pots and pans through the Chapter 13 plan, and the lien is deemed satisfied.

If you can’t cut a deal with the IRS that eliminates the tax penalties as part of an offer in compromise or payment plan, you have bankruptcy options for tax penalties.

More about Chapter 13

Get rid of credit card balances without paying interest

Why Chapter 13 Plans Fail

How Chapter 13 Works

Images courtesy of Pixabay. 

 

The Flat Wrong 1099

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credit-squeeze-transparentWhen her soon-to-be-ex filed bankruptcy, my client got a 1099-C for the joint credit card.

The form claimed that the debt was cancelled.

Therefore, she had additional income equal to the card balance.

Only, none of the statements on the 1099 were true.

The debt wasn’t discharged as to the non filing spouse.  One spouse’s discharge does not discharge the personal liability of anyone else.

Further, the liability of the soon-to-be-ex wasn’t even discharged yet since it was the beginning of a 3 year Chapter 13.

The discharge doesn’t come until all the plan payments are made.

What to do?

Cancelled debt and taxes

Tax law requires the holder of a debt that is forgiven to report the forgiveness to the IRS.

The forgiveness can be voluntary, as in, we compromised the debt and now you owe less.

Or, it can be by operation of law:  you filed bankruptcy and discharged the debt.

Either way, the tax man sees the amount of money that you no longer owe as if it were cash income.

And, if it’s income, then you owe tax on the income.

No tax in bankruptcy

If my client was the spouse who had filed bankruptcy, she would properly have gotten a 1099-C, at the end of the case.  When the debt was truly gone.

But she wouldn’t have owed tax on the discharged debt, because bankruptcy is an exception to the rule.

Debt forgiven in any chapter of bankruptcy does not trigger cancellation of debt income.  Therefore, no tax.

Tax treatment of cancelled debt is one of the sterling features of bankruptcy that make it superior to debt settlement.

Attacking the erroneous 1099

Strike first, is my thought, when the 1099 is wrong.

The credit card company issued the defective 1099. Write the issuer and request an amended 1099.

The deadline for sending out 1099’s is about six weeks earlier than the deadline for submitting the 1099’s to the IRS.

Jump on the problem right away and attempt to correct the situation before it gets to the IRS.

When the IRS gets bad information

If you couldn’t head off a submission to the IRS that was wrong, tackle the problem in your tax return.

You can’t just file the return as if the IRS didn’t think you had this  extra “income”.  You have to address the error and overcome it.

The IRS has a form for claiming an exception to the cancellation of debt income rule:  Form 982.

Attach your explanation of why the 1099 is wrong to the 982.  There isn’t a box, or an “other” category on the form where you can provide further information, so you’ll have to attach your explanation to the form.

If not resolved at the issuer level, my client will have to point out that she hasn’t been relieved of the debt, since she hasn’t filed the bankruptcy AND that her spouse hasn’t yet been relieved of the debt yet either, as there is no discharge.

Wash, rinse and repeat

I’ve spoken as though the IRS was the sole taxing authority involved.

If you live in a state with an income tax, you must repeat the drill described for the IRS with your state tax agency.

Personal liability required

Probably the most common error in issuing 1099’s is the matter of personal liability.  If the debt cancelled was non-recourse, the borrower had no personal liability in the first place.

Cancellation of a non recourse debt doesn’t alter the borrower’s balance sheet.  The borrower wasn’t personally liable before cancellation, so there’s no cancellation of debt income to address.  More on the fictional 1099.

As I said, see above and wash, rinse and repeat.

More on tax

Discharging taxes in bankruptcy

Tax liens after bankruptcy

When tax debt is a life sentence

 

Don’t Let The IRS File A Return For You

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SFR taxes

 

Bankruptcy works lots of magic with tax debt, but the magic fizzles out when it comes to SFR’s.

In my vocabulary, SFR is almost as doleful a phrase as KIA or DOA.

Three times in 10 days, I’ve had to explain to clients that the taxes associated with an IRS Substitute For Return are not dischargeable in bankruptcy.

It doesn’t matter how old the taxes are or how overstated the government’s number.

The 9th Circuit has clearly held that any return filed by a taxpayer after the IRS files an SFR is not a “return” for purposes of bankruptcy law.

I’m haunted by the client who explained that he was too stressed or depressed or distracted to file a return, so he “just let the IRS file the return.”

The taxes associated with the SFR would be fully dischargeable in bankruptcy when we met, had he only filed a return.  Now he has to wait out the IRS collection statute of 10 years from assessment.

Discharging taxes

One of bankruptcy’s greatest “tricks” is wiping out taxes long before the statute of limitations runs.

Applied to income taxes, bankruptcy allows the discharge of taxes, for which a return was filed, if the return was last due without penalty more than three years before the bankruptcy is filed.

The two other requirements are that if the return wasn’t filed on time, that it have been on file for at least two years, and the tax in question assessed more than 240 days before filing.

So, the first requirement for discharge is that a return was filed.

If it’s an SFR, it’s not a return.

Taxes die of old age

If there is good news here, it is that taxes assessed pursuant to an SFR are then subject to the same statute of limitations as regularly filed taxes.

As well, the statute can be extended by various tolling events.  Dense discussion of tolling events , starting at page six.

The bad news, experienced by one of my clients, is that the IRS can extend the collectability of a tax by seeking a judgment.

Note, too, that if neither a regular return nor an SFR is filed, the statute of limitations never starts running.

Get documents to file taxes

If you haven’t filed tax returns because you don’t have the necessary documents about your income and expenses for a past year, help is available.

Help, in fact, from the IRS. 

Get your tax transcript

You can order a transcript from the IRS that shows the information about that tax year that has been reported by others to the IRS.

Use that information, plus anything else you have, to do your best to file the return.

It’s a race to see if you get a return filed before the IRS files a substitute for return.

The good news is that the IRS gives you lots of notice that they haven’t gotten a return.  You get lots of warning that you are at risk of suffering an SFR.

Heed the warning, and keep your tax options open.

 

Find The Lost Tax Deduction When Lender Misreports Mortgage Interest Paid

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How can you pay thousands of dollars in mortgage payments in a year, and get a  tax Form 1098 for a fraction of actual mortgage interest paid?

That’s what my client wanted to know.

His monthly mortgage payment is $2715.  The loan is currently interest only.  All the payments were made.

And yet, the Form 1098 from PNC says the year’s mortgage interest paid is only $1800.

So what happened to the other $30,780?  That’s a lot of money to go missing.

Welcome to the further screwed up world of mortgage loan servicing.

The short answer right now to the question I posed at the top is I don’t know yet.

But here’s what I suspect.

What servicer does with your payment

I’ll bet that PNC, the servicer I love to hate, has put the monthly payments in suspense, and has not posted them to the loan.

Federal law requires mortgage payments be posted the day of receipt

By holding them in suspense, they don’t show up as interest paid on the mortgage.

Why the payments were put in the suspense account I don’t know.

What it takes to get them out of suspense, we’ll have to see.

Getting your taxes right

My advice to the client and his tax preparer is to claim a deduction for all of the year’s mortgage payments.  It may conflict with the information provided by the servicer, but the servicer’s information doesn’t necessarily control.

If you don’t claim as large a deduction as you think you are entitled to, the IRS isn’t going to come back and urge you to correct an error that’s in their favor.

You may have to later convince the IRS that your calculation of the amount of interest you paid is correct and the servicer’s statement is wrong.  A copy of the monthly mortgage statement and a escrow analysis statement are a starting point.

Consider as well whether the same problem exists in prior years and if an amended tax return is worthwhile.

Lupe_MännchenTax sleuthing

In the meantime, I’m going to read the note and deed of trust that governs how the lender is supposed to credit payments.  Most security instruments set out the order in which payments are applied to amounts the borrower owes.

I’m hitting the RESPA regulations on suspense accounts and their use and misuse.

And then we’ll spring a Request for Information and a Notice of Error on the servicer.

I wonder how many other servicers will be outed when they produce palpably erroneous tax documents.

Related

Cancellation of debt and taxes

Tax deductions hidden in Chapter 13

Image of boxed money courtesy of Locomomo and Flickr

Avoid Paying Taxes On That 1099 Form, Legally

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IRS form 1099tax magnifiedIt’s tax time and the mails are full of IRS form 1099.

If you managed a short sale of your property; suffered a foreclosure; filed bankruptcy; or settled your debt for less than you owed, you probably got a 1099.

But that’s not the end of the tax story.

Receipt of the form does not mean  that you must include the reported sum as income.

Please repeat:

mere receipt of the form does not mean you are necessarily paying taxes on that money.

Form 1099 is an informational form.  It is sent out routinely and without much thought on the creditor’s part.

When real property changes hands or when a debt is forgiven,  the creditor involved is required to report the transaction to the IRS.  You,  the potentially affected taxpayer, get a copy.

Here’s the action plan to avoid paying more tax.

Claim the exceptions to the rule

The Internal Revenue Code starts with the proposition that debts that are forgiven increase your net worth.  In IRS-think, there must be a tax due.

But there are exceptions.  The three most important exceptions for my clients:

  1. Bankruptcy
  2. Insolvency
  3. Qualified mortgage indebtedness

Fit in one of these exceptions and the cancelled debt does not get added to your taxable income.

To establish your right to exclude the money shown on the 1099, you have to file IRS form 982.

If you don’t file the form and claim the exception, the IRS has no way to know that, despite the debt forgiveness, there is no tax payable.

Form 982 tax-avoiding choices

Form 982 lays out the possible reasons forgiven debt might not be taxable.

Bankruptcy–  A discharge in bankruptcy forgives the debt without tax consequences.  It’s the first exception found on Form 982.  Bankruptcy law is found in Title 11 of the United States Code. The tax exception applies to the discharge of debt in any chapter of bankruptcy.

Insolvency–  Perhaps,when the debt in question was forgiven, you still owed more to other creditors than the value of your assets.  You don’t have to include the forgiven debt in your income.  You were insolvent.  Note, however, that the solvency calculation here includes the value of retirement assets that your creditors can’t reach.  Many people who have little net worth outside of retirement savings are actually solvent when you add in pensions, etc.

Qualified mortgage indebtedness-  With the Great Recession and a slew of foreclosures, Congress enacted a short term safe harbor for the debt forgiven on a principal residence.  The loan must have been was used to buy or improve the home.  The law was recently extended to include tax year 2016.

In case of mistake

Another situation where you might get a 1099 but not owe tax is where you had no personal liability for the debt;  that is, the debt forgiven was a non recourse debt.  The foreclosure agent probably has no way to know whether the lender had a right to sue you.

When your debt wasn’t really cancelled

If none of the other exceptions to inclusion in income apply, make sure you consider whether you had personal liability for the debt.  If not, seek to have the 1099 corrected, or attach an explanation to your tax return with the facts of your situation.

Remember, just because they sent you the form doesn’t mean you owe the tax.

More on tax return issues

Mortgage interest missing from Form 1098

Tax deductions hidden in Chapter 13

Tax question roundup

Are you insolvent for cancellation of debt purposes

Consequences of unfiled returns

Image courtesy of IRS EIN

 

Get Tax Credit For Mortgage Interest Paid In Bankruptcy

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MORTAGE INTEREST DEDUCTION

Is your Chapter 13 plan  paying back mortgage payments that were delinquent when you filed bankruptcy?

If so, a tax deduction lurks, unclaimed, in the trustee’s records.

Track down that tax deduction, add it to your tax return, and you reduce your federal income tax burden.

But it’s difficult because, for reasons I have not been able to figure out, the lenders don’t send IRS form 1098’s to either you or the trustee for mortgage interest paid through the plan.

So you don’t have proof that mortgage interest was paid, and neither does the IRS.

But, we can fix that.  I recently had occasion to walk a client through the process of figuring out the mortgage interest paid by the trustee.

I’ll retrace my steps and you can see how I figured out that he’d paid some $50,000 in mortgage interest  over the years of his plan that he hadn’t yet claimed on his taxes.

1.  Find the interest element in the lender’s proof of claim.

To be paid through a Chapter 13 plan, the lender must file a proof of claim on official form B410.  The mortgage attachment to that form, B410A has a line in Part 2 for “interest due”.

That line shows us what part of the missed payments, as of the filing of the bankruptcy case, was made up of mortgage interest.

2.  Calculate what percentage of the arrears is mortgage interest.

Part 3 of the mortgage attachment form breaks out the elements in the lender’s claim in the bankruptcy.  We need to know what fraction of the total claim the trustee will be paying is interest.

Take the “interest due” amount you located in Step 1 and divide it by the total at the foot of Part 3.

That’s the percentage of the total claim of the lender that’s interest.

3.  Access the Chapter 13 trustee’s site for payments to mortgage creditor

Chapter 13 trustees use different software to account for their operations.  You should have received information at the beginning of your case on accessing information about your payments and the trustee’s disbursements.

If you need help with the trustee’s web site, call the trustee’s office for help.

On the trustee’s site for your case, find the claim filed by the mortgage lender.  There should be a list of the date and amount of each payment made to the creditor on account of your mortgage arrears.

Total the payments for the last calendar year and multiple that total by the percentage of the claim that is interest, from Step 2 above.

Bingo! you have the number that represents what the trustee paid your creditor in mortgage interest for that calendar year.

Tax accounting rough and dirty

Your figure for mortgage interest paid in a year is an approximation.  By the end of the plan, the amount of interest paid will equal the amounts you’ve calculated this way.

The creditor may have applied it to your account differently.  Mortgage loan servicing is so erratic and inaccurate these days that it’s hard to tell.

If this calculation is off, it probably underestimates the amount of interest in the early payments from the trustee.  Most mortgages require the lender to apply payments first to interest, then to principal, then to expenses.  My experience is that they seldom follow the rules.

If anyone objects to your calculation, make them propose a better one.  Or make the recipient of the mortgage interest account for it in the usual way.

Save your work

Outside of bankruptcy, the lender would send you and the IRS a copy of their report on Form 1098 for mortgage interest you paid during the tax year.

We’ve done this sleuthing because they didn’t tell either the IRS or you what you paid in mortgage interest.

So, you may have to show the IRS how you got to a deduction that doesn’t appear in their records.

Print or save to pdf each of the documents you used to make your calculation.  You want to be able to support the deduction if challenged.

Another path to tax deduction

Alternatively, you could use the Request for Information process found in RESPA to ask the servicer of your loan how much interest you paid in a calendar year.

Servicers are required to provide answers about loan servicing within 30 business days of your request.  Requests must be in writing and contain identifying information.  More on how to make a Request for Information.

When tax professionals aren’t busy, see about amending prior returns.

Amend earlier returns

Federal tax law allows you to amend tax returns for three years from filing.  There’s an IRS publication for amending returns.

You can calculate what you paid through the Chapter 13 plan for prior tax years and amend those returns to claim this deduction.

Gather your calculator and get on the trail of these illusive, but valuable, mortgage interest deductions.

The Truth About Tax Liens After Bankruptcy

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liens after bankruptcyWe have a lien on your name.  Not your property, your name.

That’s what the county tax collector told my client, years after he got his bankruptcy discharge.

And that multi-thousand dollar lien claim threatened to sink the refinance of his house.

Eventually, we got the county straightened out without going back to bankruptcy court, and the lien claim withdrawn, but only after educating the county on liens and bankruptcy.

Here’s what was wrong with the county’s claim they had a lien on my client’s name.

Liens attach to assets

The initial nonsensical claim is that a lien attaches to someone’s name.

A name isn’t property.  You can’t enforce a lien against a person’s name by seizing the name and selling  it.  That’s what a creditor would do with a valid lien that attaches to an asset.

Yet the tax collector claimed the lien was against the name of my client. Not a lien against his home, but a lien that entitled them to payment from a real estate refinance.  (Not logical, but this was a tax collector.)

Perhaps the tax collector was trying to say that the lien wasn’t one for real property taxes on that particular house.  Or she was saying that it wasn’t a consensual lien where the homeowner pledged his house as collateral for a loan.

But she definitely contended that the lien on my client’s name survived his bankruptcy.

Liens don’t snag post bankruptcy assets

The second bit of nonsense was the claim that the county had a lien in the house my client acquired after he filed bankruptcy.

The law on liens and a bankruptcy discharge is straightforward:

  • Liens that attach to an asset owned on the day you file bankruptcy survive the discharge
  • If the debt supported by the lien is not discharged, the lien attaches to property acquired after bankruptcy
  • If the debt is discharged, there’s no lien on newly acquired stuff.

It’s the last proposition that saved the day for this client.  The county’s tax claim was discharged in the bankruptcy.  My client didn’t own a house when he filed.  Therefore, the county got no lien on after-acquired property on account of a debt that was discharged.

Preventing post bankruptcy surprises

It’s not uncommon for creditors to pop up after bankruptcy with a claim inconsistent with the bankruptcy discharge. It happens because of ignorance, incompetence, and, occasionally, sheer greed.

Bankruptcy courts stand ready to enforce the rights that debtors get from bankruptcy.  But that takes time.

When a judgment lien pops up after bankruptcy

The trouble comes when the creditor stands to upset a real estate transaction that has a deadline, and possible costs associated with missing that deadline.  Like my client trying to refinance his house. Interest rates are going up.  Miss the deadline and pay a higher rate for the life of the loan.

If real estate is involved, start immediately to see what liens show in the public record. In California, where I practice, that means get a preliminary title report at the first opportunity.

Identify any liens that are unenforceable by reason of the bankruptcy discharge, or by reason of having been paid, died of old age or avoided in bankruptcy.

My attack on the county tax collector started with providing the creditor mailing list from the case, showing that the county had notice of the bankruptcy.  I sent them a copy of the discharge order and the schedule that showed that my client didn’t own the house when he filed years ago.

Having given the county good notice of the bankruptcy, way back when, my client avoided more than $10,000 in tax claims.

And his name was his own.

More

Dealing with tax liens in bankruptcy

When creditors ignore your discharge

The IRS after your bankruptcy case

 

 

If The IRS Comes Calling After Your Bankruptcy Discharge

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tax after bankruptcyIt’s scary, or infuriating, when the IRS continues to try to collect taxes discharged in bankruptcy.

What was the point of filing bankruptcy if the government ignores your discharge?

Yet IRS attempts to collect taxes from people with a bankruptcy discharge form the single largest group of cases in my law office today.

Why the IRS persists

Seldom is the IRS correct that taxes are still due.

Sometimes, the IRS is confused.  Other times, they appear to be indifferent to the bankruptcy discharge.

Too often, I suspect that their record keeping system is not up to the job.

But, whatever the excuse, you need to get it sorted out.  Let’s look at common issues found in IRS collection letters after bankruptcy.

Tax lien lives on

The most common letter from the IRS after a bankruptcy concerns tax liens that survive the bankruptcy.

A Chapter 7 discharge does not affect tax liens.  Tax liens pass through a Chapter 7 unaltered.

When a tax is discharged in bankruptcy, the tax lien does not attach to assets acquired after bankruptcy

Whether by design or not, the IRS letter to taxpayers emerging from bankruptcy with a surviving tax lien is poorly written.  It  doesn’t clearly spell out that the tax the IRS is trying to collect is just the sliver of taxes that attached to assets of value owned when the case was filed.

What to do?  Decide if the continued existence of the lien makes any difference in your economic life.  If you need to apply for significant credit, you may want to wipe out the lien by paying the value of the “stuff” it attached to when you filed.  If the lien attaches only to personal property with little real value, you may choose to simply let the lien die of old age.  Taxes are generally collectible only for 10 years from the date they are assessed, with some time added for time in bankruptcy.

IRS failed to credit taxes paid in Chapter 13

Can’t tell you how often this comes up.  The IRS is little better than mortgage servicers in keeping track of the money it is paid.

Occasionally, the confusion arises when only one of a married couple filed Chapter 13.  Somehow, the IRS didn’t connect the taxes paid through the Chapter 13 plan with the tax liability of the non filing spouse, even when the liability was joint.

Similarly, if the taxes arose in a business, the IRS may not have recognized that taxes paid by an individual or that individual’s Chapter 13 trustee were on account of business taxes.

What to do?  If a polite letter pointing out that the tax has been paid doesn’t fix the problem, the collection actions violate the discharge injunction in the bankruptcy case.  Brought to the attention of a bankruptcy judge, the IRS may get its knuckles rapped and be ordered to pay your attorneys fees and any damages you suffered.

IRS doesn’t understand the community property discharge

The Bankruptcy Code has been around in its present form for nearly 40 years, but the IRS can’t get its head around the community property discharge found in §524(a)(3).

That statute says that the bankruptcy discharge granted to one spouse protects a couple’s community property acquired after the bankruptcy filing from debts discharged in bankruptcy.

So, taxes discharged in one spouse’s bankruptcy can’t be collected from the community property of the spouse who didn’t file. (The non filing spouse may be exposed to collection if that spouse has separate property and is also liable for the tax).

What to do?  Start by educating the IRS.  Point out that your spouse has a discharge, you remain married, and your community property is protected from pre bankruptcy tax collection.  This one is trickier, since the IRS has legitimate rights to collect from separate property, if there is any.

You miscounted the passage of time

Consider whether the mistake might be yours.  The bankruptcy discharge doesn’t list the debts discharged in your case;  it simply says that the dischargeable debts are discharged.

The central factor controlling whether the unsecured portion of a tax is discharged is the interval between the assessment of the tax and the filing of the bankruptcy.  The calculation can be complicated by prior bankruptcy filings and other events that pause the clock.

What to do?  Get an experienced bankruptcy attorney or a tax professional to review whether the tax the IRS wants to collect was really discharged.  If it was discharged, go back to court for help from a bankruptcy judge.

IRS simply screwed up

It happens these days more than it used to.

The IRS is understaffed and technologically challenged.  They make mistakes.

If the IRS, or any other taxing authority, had notice of the bankruptcy filing, they are legally obligated to honor the discharge, even if it’s hard to do.

What to do?  First off, write a letter with the proof that the taxes are discharged.  Usually that means sending a copy of the bankruptcy schedules listing the IRS and a copy of the discharge along with the collection letter they just sent.  Most bankruptcy judges want you to give the offending creditor a chance to fix the problem before running back to court.  You set yourself up for a better result in court when you’ve made a business-like attempt at self help and been brushed off.

Bottom line

The bankruptcy discharge does apply to taxing authorities.  Just because it’s the IRS doesn’t mean they are right.

More

Discharging taxes in bankruptcy

Debt collectors after your discharge

Who to pay after bankruptcy

 

Audited? Did You Tell The State Tax Authorities?

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tax audit

We’re all about sharing these days, aren’t we?  So, did you share with the state tax authorities the outcome of your IRS audit?

While telling the Franchise Tax Board that you owe more taxes to the feds may seem like inviting trouble, you gain by doing so.

How?

You set those taxes owed to California up for discharge in bankruptcy.

And that’s a nice card to have up your sleeve.

Here’s why.

Taxes discharged in bankruptcy

A central requirement to wipe out tax liability in bankruptcy is the filing of a return.  Bankruptcy Code 523(a).

Taxes that are unassessed but still legally assessable when you file your bankruptcy case don’t get discharged.

If you owe more taxes as a result of an IRS audit, bankruptcy law treats any resulting increase in your state tax liability as one for which you haven’t filed a return.  That is, unless you have made a report or filed an amended tax return with the state.

No return or report, no discharge of the state tax increase.

Tax exposure under California law

California law requires that you share the results of a tax audit that increases your taxes to the Franchise Tax Board.

Edited for clarity, Revenue & Taxation Code 18622 provides:

(a) If any item required to be shown on a federal tax return, including any gross income, deduction, penalty, credit, or tax for any year of any taxpayer is changed or corrected by the Commissioner of Internal Revenue …, that taxpayer shall report each change or correction…, within six months after the date of each final federal determination of the change or correction or renegotiation, or as required by the Franchise Tax Board, and shall concede the accuracy of the determination or state wherein it is erroneous. For any individual …changes or corrections need not be reported unless they increase the amount of tax payable …for any year.

(b) Any taxpayer filing an amended return with the Commissioner of Internal Revenue shall also file within six months thereafter an amended return with the Franchise Tax Board…  For any individual …, an amended return need not be filed unless the change therein would increase the amount of tax payable…

So, if changes to elements of your return by reason of an IRS audit would result in you owing more state tax, you have to report that change to the FTB.  If you are required to file an amended federal return, you have six months to file an amended state tax return if you owe more state tax as a result of the audit.

Reporting requirement in other states

California isn’t alone in requiring you to share the audit bad news with the state.  The AICPA organization of CPA’s put out this summary of tax audit reporting requirements nationwide.

More on taxes in bankruptcy

Timing is everything when discharging taxes

Tax liens after bankruptcy

Chapter 13 is a tax tool

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.

There’s no corporate shield when it comes to payroll taxes. Even if the employer is a corporation, the corporation’s managers are personally liable for the trust fund portion of unpaid 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 with sending the withheld money in.  A bankruptcy discharge is no help here. [Read more…]

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Phone: (650) 694-4700

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