Northern California Bankruptcy Lawyer

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The Soap Box

California Bankruptcy Lawyer Puts Information Out There – Too Bad He’s Wrong On The Basics

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I applaud attorneys who make sound information about bankruptcy available to the public.  My only requirement is that their information be true.

The truth is income taxes are dischargeable in bankruptcy if 3 reasonably simple conditions are met;  debts to the government are generally dischargeable in bankruptcy.

Please reread that line, and get that bit of law in your head.

Because you wouldn’t know the truth of the statement above from reading the blog of this lawyer (who puts himself forward as an expert on bankruptcy law) whose opening line is utterly and absolutely wrong on the law.

Is Vincent Howard of Orange County  really giving this information out to his clients? I surely hope not. [Read more…]

What’s Up The Day After Tax Day

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The tax extension in the mail and you don’t have to think about income taxes til October 15th approaches.  Right?

Not in my book, if you are self employed.

The self employed don’t have their estimated income taxes withheld from their paychecks.  There aren’t any paychecks if you are among that resolute band of entrepreneurs, small business folk, and independent professionals.

You are expected to make quarterly tax deposits throughout the year toward the current year’s taxes.

But as I asked bankruptcy clients over the past couple of months about the status of their tax return, I saw a pattern in those who expected to ask for an extension of time to file the return.

Almost always, they were putting off making tax deposits for this year until their tax professional calculated the right amount.  They were not only extending the time to file last year’s return, they were postponing advance payment for this year’s taxes.

Courting tax trouble

The light at the end of the tunnel is the approaching express train.

Put off beginning to provide for this year’s taxes, waiting for a precise calculation, and you set yourself up for a tax casualty.  You may be short come next spring’s tax season.

In a perfect world, you don’t want to pay more taxes into Uncle Sam’s holding than necessary.  But in my experience, the longer you delay beginning to pay, the more likely you can’t pay when you reach year’s end.

I’ve even advocated ditching quarterly tax deposits in favor of monthly tax deposits.

No harm, no foul

Here’s my proposition for those on extension:  deposit at least one quarter of the taxes from the last filed return in April, and each quarter thereafter until your accountant calculates more precisely what is required for this year.

If that turns out to be more than a quarter of your estimated liability for the current year, you can even it out in the later quarters by reducing your deposits.

If you find you’ll owe more taxes this year than you did two year’s ago, you’ve at least gotten a start toward paying.  You’ll have to make larger deposits in later quarters to avoid penalties for being under withheld.

But that beats confronting a larger-than-expected tax debt without having made any provisions for payment.

Being self employed is a heady proposition, as long as the heady feeling isn’t oxygen deprivation when you learn you owe a fistful of taxes, for which you’ve made no provision.

Image courtesy of complexify.

Skip Filing Your Tax Return And The Tax Lives Forever

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Tax Myth Saddles You WIth Tax ForeverIt’s tax season and tax myths are everywhere.  Know what the most dangerous one is?

If you can’t pay the tax on the return, you’ll escape collection action if you keep a low profile by not filing the return.

I hear it repeatedly, each year, year after year.  And it’s wrong, over and over.

Four counts of wrong

First, I’ve seen no evidence that the IRS leaps immediately to chase taxpayers whose filed return shows an unpaid liability.  In fact there’s a right to an installment agreement if your unpaid tax is $5,000 or less.

Second,  failing to file the return on time triggers a tax penalty separate from the penalty for not paying on time.  There are two penalties in play here:  a penalty for not filing and a different penalty for not paying.

Third, duck the requirement to file, and somehow you’ve given yourself permission to keep putting it off.  And of course, now that you are late, you have penalties added to the liability and the interest clock is ticking.

But most importantly to a bankruptcy lawyer is that you cannot ever discharge the tax debt in bankruptcy if the return is not filed.

Discharging tax in bankruptcy

Bankruptcy law sorts tax debts into three piles:

  1. taxes secured by a lien
  2. taxes that survive a bankruptcy
  3. taxes dischargeable without payment

If you’ve got tax troubles, you obviously want your obligations to fall in that third pile, the dischargeable taxes.  Care to guess what the factor that determines dischargeability?  The length of time the return has been on file.

The rule, simplified a bit, is:  taxes are dischargeable in bankruptcy if they relate to a tax year whose return was due more than three years before bankruptcy; for which the return, if not filed on time, has been on file for two years; and the taxes for that year were assessed more than 240 days before filing.

So, you can’t begin to consider wiping out tax debt if you don’t file the return and that return needs a certain degree of aging before discharge is possible.

Bankruptcy is not the first choice of ways to resolve tax troubles, but bankruptcy can eliminate tax debt if it comes to that.

But not if you follow the myth that you don’t file the return until you can pay the tax.

Image courtesy of wikimedia.org

Bankruptcy Alphabet: I Is For IRS

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“I” stands for IRS in my Bankruptcy Alphabet. Bankruptcy law treats the IRS little different  than other creditors.  The tax collector is just one of the boys.

But the most important point is that income taxes can be erased in bankruptcy.  There are rules, three of them in fact, that govern when income taxes can be discharged:

  1. The return for the tax must have been due, including extensions, more than 3 years before the filing.
  2. If the return was not filed on time, it must have been filed more than 2 years before the filing.
  3. The tax must have been assessed by the IRS more than 240 days before filing.

The IRS must respect the automatic stay. When a bankruptcy case is filed, all creditors, including the feds, must stop all efforts to collect.  The IRS  must lift garnishments.

There are a couple of exceptions:  the IRS can assess taxes after the filing without violating the stay and they can audit tax returns.  But collect they can not.

Taxes for recent years get a priority for payment in bankruptcy.  If the trustee gathers up money for creditors, the priority taxes are paid in full before general, unsecured creditors get anything.

If a tax is dischargeable, the penalties associated with that tax get discharged as well.

Each of these rules applies to state income taxes as well.

Part of the appeal of Chapter 13 to me is that priority taxes, that can’t be discharged, can be paid over time, without interest and the penalties discharged!  Sweet deal.  And IRS liens, which cover everything a taxpayer owns, can be paid to the extent they attach to something with value, and stripped to the extent there is no value for the lien to attach to.

In this day of epidemic foreclosures, know that a foreclosure or short sale after filing your case  immunizes the homeowner from cancellation of debt income under Internal Revenue Code 108.  A discharge of a debt in a case under Title 11  does not produce a tax debt.

In bankruptcy attorney Jay Fleischman’s world, and his alphabet, I is for Income.

Image courtesy of takomabibelot.

Why Credit Cards Win Clash of Titans

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Credit cards vanquish tax collectorIn the tug o war of which creditor to pay, why is it that credit cards win over taxes and child support?

I’m accustomed to clients who pay creditors rather than provide for their own health care, emergency fund, or retirement. That’s taking care of commitments to others before self.

But I haven’t figured out why embattled debtors choose to pay the credit card collectors instead of child support and taxes. Yet that was just what this week’s client had done: $10,000 in taxes and $24,000 in support for a child went unpaid, while he chipped away at credit card debt.

To a bankruptcy lawyer, this is insane, since both family support and recent income taxes are priority claims, not dischargeable in bankruptcy.

To an outsider, it’s still insane, since the IRS can simply take all the money in your bank account, without suing you first. And your child is dependent and yours, not to mention that failure to pay child support is the one debt that can get you jailed.

Those are the creditors to fear.

I have two theories of why people choose to pay credit cards instead of taxes or support.

  1. Terror of the Telephone: the credit card companies call, and call, and call if you don’t pay. They invade your personal space at home, and they confront you with your financial shortcomings incessantly. It’s hard on the nerves and the ego.
  2. Credit Report Obsession: fixated on credit reports and credit scores, clients focus on the immediate “damage” that credit card delinquencies can inflict, and set aside the more lasting damage that tax liens and wage intercepts can cause if you ignore the feds and the child support authorities.

Credit card companies can’t take your money without suing you first, so they have to use fear and shame to get you to distort priorities and pay them first.

We need to get that word out.

Who to pay when you can’t pay everyone

Debts that don’t go away in bankruptcy

Image licensed under Creative Commons, courtesy of Javier Kohen.

 

Tax Fallout from Foreclosure & Loan Modification

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Foreclosure generates taxIt’s bad enough when the client loses their home to foreclosure, but it’s a double whammy when the tax bill arrives for money they never saw. Scope out the tax traps in the world of indebted clients at a 2 hour workshop for lawyers and tax professionals April 9 at Lincoln Law School.

Be prepared with answers when clients ask:

  • Should I try for a short sale?
  • What does this 1099 mean?
  • Are there tax consequences of a loan modification?

Bill Purdy, tax professor and real estate law practitioner, will discuss recourse and non recourse debt and the tax consequences of foreclosure. The workshop runs 2 hours and MCLE credit is available. Advance sign up is required.

The program will be available later electronically. If you want to be notified when the electronic version is ready, send an email to [email protected]

File Your Tax Return Or Get An Extension?

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spotlightFiling a tax return does not focus a spotlight on you.

Really.

I regularly see clients who have not filed returns because they have some issue with the IRS.

They either have taxes that will be owed with the unfiled return, or taxes owed from earlier periods.

They think they are avoiding trouble by not filing.

Not so.

It seems that it takes weeks, or even months for returns to get entered in the system.

I have seen no evidence that collection action is triggered by filing a return even with a balance due.

Tax penalties coming and going

The IRS levies two separate penalties for non filers: a penalty for not filing the return and a separate penalty for not paying the tax.

Perhaps you can’t pay all you owe with the return, but why incur an avoidable penalty for not filing a timely return?

Tax penalties are not dischargeable in Chapter 7 until they are more than three years old. Contain the damage: file on time.

Further thoughts on why filing taxes sooner is better than later

Image courtesy of Johnarobb.

643 Bair Island Road
Suite 403
Redwood City, CA 94063
Phone: (650) 694-4700

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