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Can IRS Really Collect Interest On Taxes Paid Through Chapter 13?

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interest on tax after bankruptcyAt the end of a Chapter 13, you may still owe some interest on taxes included in bankruptcy.

But not nearly as often as the IRS would have you think.

It’s a huge let down to think after all the payments in a Chapter 13, not everything went away.  But in a narrow slice of situations, it happens.

Here’s the deal:  if the tax is one that’s dischargeable in Chapter 13 according to the Bankruptcy Code, then no interest is due at discharge.

If, however, the tax was a non dischargeable tax which was paid in full through the plan, then the IRS is entitled to interest.

That interest covers the period after the filing of the bankruptcy case.  Any interest on the tax that accrued before filing is part of the tax claim in the case.

To figure out whether you really owe the interest on tax the IRS now claims, you need to know not just what taxes you paid in the case, but which ones were dischargeable. [Read more…]

Tax Liens Live On After Bankruptcy, Unless….

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Tax ProblemsYou 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? [Read more…]

Tax Tips & Tidbits

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school-93200_1280_opt

Tax filing deadline approaches, so I thought we’d gather up information on taxes here on Soapbox and elsewhere.

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.

 

 

Pay Or Go To Jail Tops IRS List Of Tax Scams

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?????The phone caller recites his IRS badge number.

Then he demands immediate payment of “overdue taxes” by wire transfer or debit card.

Fail to pay, he warns, and you will be arrested.

Or lose your license. Or be deported.

Absolutely horrifying.

And absolutely untrue.

Yet this scenario is repeated often enough that it made the top of the IRS’s Dirty Dozen Tax Scams.

How tax scam works

Scammers provide just enough to suggest they are real:

  • a badge number (made up);
  • a call back number (spoofed to look real); and
  • some part of your Social Security number.

[Read more…]

Scammers Spoof IRS To Get Your Info

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computer scam

Tax season saw a 400% rise in fake email to taxpayers pretending to be from the IRS.

The scammers want you to click a link, give them information, or otherwise open yourself to identity theft.

Identity theft and the diversion of tax refunds is the number one 2016 tax scam.  Fake email is third.

Protect yourself as poet Ogden Nash suggested:  if a panther calls, don’t anther.

What fake IRS officers want

The IRS lists “phishing” as number 3 on its list of Dirty Dozen Tax Scams.

The larcenous email might ask about tax refunds, your tax filing status, or tax transcripts.  Other scams want you to “confirm” personal information or give up PIN numbers.

The links they offer look like IRS links, but they are as fake as the email.

Watch out for fraudsters slipping these official-looking emails into inboxes, trying to confuse people at the very time they work on their taxes. We urge people not to click on these emails.” says IRS Commissioner John Koskinen

I can tell you from my professional experience dealing with the IRS on bankruptcy tax issues:  the IRS is the least likely entity to use modern technology. [Read more…]

Claim Tax Deductions Lurking In Your Chapter 13

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Tax deductions may be hiding in your Chapter 13.

Did you file for an extension of time to file your income tax return?

Well, time to get the return done is running out:  returns are due October 15th.

If you are in a Chapter 13 bankruptcy case, you may have deductions you haven’t considered found in the payments the Chapter 13 trustee has made in your case.

If your plan provides for

  • curing mortgage arrears,
  • paying taxes,
  • spousal support or
  • business expenses,

consider claiming amounts paid to those creditors through your plan as deductions.

The Chapter 13 trustee is paying those claims with your money.  I see no reason that the trustee’s expenditures aren’t deductible to you.

Check with your tax professional.

And if you are several years into a Chapter 13, consider whether you can amend prior years to claim the trustee’s distributions for earlier years.

More on tax issues when you’ve filed bankruptcy:  the 1099.

Lurking kitty courtesy of Aftab Uzzaman and Flickr under Creative Commons license.

 

Time Running Out To Claim Prior Year Tax Breaks

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hourglass-23654_1280Time is running out on your 2011 tax return.

Whaaaat?, you say.  You’re working on 2014 between now and April 15th.

But if you’re one of those people who overlooked a tax deduction or, better yet, a tax credit like EITC, you’re running out of time to amend your 2011 return and capture some of that money.

An amended return must be filed within three years of the date you filed the original return or within two years of when you paid the tax.

Fix your tax glitches

Tax law allows you to amend returns when you’ve discovered an error, that’s not math related. (If it’s just math, the IRS will fix it without an amendment.)

I’ve written lots  about overlooked tax deductions and credits.

Remember that you can not only do better with this year’s return, you have the right to go back to the last three tax years to claim money you left on the table in prior years.  But the IRS may correct your math blunders, but it won’t claim overlooked deductions or credits for you.

Overlooked tax savings

The biggest missed deductions for my bankruptcy clients are mortgage interest and taxes paid through a Chapter 13 plan.

My client last week had paid $65,000 in mortgage interest through his Chapter 13 plan over 5 years, but hadn’t claimed it on his taxes.  And come April 15th, he’ll lose the chance to go back to the 2011 return and claim the deduction, and the reduction in tax the deduction brings with it.

Property taxes and state income taxes, if paid through a Chapter 13 plan, ought to be equally deductible.

And if your Chapter 13 took care of business debts or payroll or sales taxes, those may be deductible business expenses.

Deductions vs. credits

We talk loosely about “writing off” certain expenses on our taxes.  That’s short hand (or short-speak) for a deduction.

A deduction reduces the amount of income on which our taxes are figured.  Less income, less tax.

But better than a deduction is a credit.  A tax credit is like a preloaded credit card.  It’s a dollar for dollar reduction in the actual tax you owe.

Which brings me to the Earned Income Tax Credit, money available for the claiming, by low and moderate income families.

Earned Income Tax Credit

This is one of the very few tax breaks that go to low income Americans;  studies show most tax breaks go to the very rich (but that’s another post).

We’re talking real money here:  the smallest credit for a single person with no children is $496;  the largest, for a family with three or more children is $6,143.

A family with three or more children can claim the credit for 2014  even if their income was $52,427.  And you don’t have to have children to get the credit if you are over 25, not claimed as a dependent by another taxpayer, and made less than $14,590.

Here’s the IRS EITC page with links and more detail about who qualifies and how to claim the credit.

The IRS has instructions on how to claim the credit for past years, including links to the earnings caps for 2011, 2012, and 2013.

The United Way’s EarnItKeepItSaveIt program helps taxpayers, for free, file to claim the credit.

Only days left

You lose out on a refund or a tax credit for 2011 if you don’t amend your return in time.  The time, as I calculate it, is April 15, 2015.

So if you left money on the table for prior tax years, get moving and get an amended return, or an original return on file, in time to get your money back.

 

Image in the public domain courtesy of Nemo and Pixabay.

Why Tax Software Is Lousy Purchase

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5930176734_380196d14c_zWhy pay for Turbo Tax or its competitors when, odds are, you can get it for free?

Unless you like burning money.

Seventy percent of American taxpayers qualify for free tax software.

If your income was $62,000 last year or less, you can use commercial tax filing software for free through the IRS FreeFile program.

Software is free, filing the return is free, and direct deposit of your refund is free.

Did I mention it was free?

Filing state tax returns

Some twenty states participate in the FreeFile, too.  Find your state from this map.

California, where I live, hasn’t joined FreeFile, but has its own, free on line tax filing service.

Need tax help?

If you have trouble doing your taxes on your own, there’s free help with your return, too.

Trained volunteers help those with low incomes, disabilities or limited English through VITA, Volunteers Income Tax Assistance.  Find a VITA site near you.

AARP also runs free tax assistance programs for low to moderate income tax payers called Tax Counseling for the Elderly.  They’re everywhere, too.

And then there’s the United Way’s EarnItKeepItSaveIt tax help program.  Free tax help, focused on helping low income individuals and families claim the Earned Income Tax Credit.

Through the EITC you can not only get a refund of the taxes you’ve paid during the year, but get an additional credit, payable in cash, depending on the composition of your family.

Find a Bay Area EarnItKeepItSaveIt program

Don’t burn money: get help and maybe even a refund on your taxes.

Image: taxrebate.org.uk

Tax Question Roundup

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soapboxNot long til tax returns are due.

Time for a roundup of tax issues I see from atop my soapbox.

I’ll point you to fuller discussions of tax topics.

Are Chapter 13 payments deductible?  

I’ve never seen a claim that the entire monthly payment is deductible.  In a case where all of the debts were business debts, it might be possible.  But distributions by the trustee on debts like taxes or mortgage interest that were  deductible outside of bankruptcy should be deductible.

Do I have to include amounts on 1099’s I got?  

Since the IRS got a copy of every 1099 that you got, you can’t ignore them.  But 1099’s don’t necessarily mean more tax.

Should I request an extension if I can’t pay what I’ll owe?  

The law allows you to avoid penalties for late filing if you request an extension of time to file.  The interest clock on taxes you owe doesn’t stop, however.

Are property taxes a priority for payment when money’s tight?  

I can only speak authoritatively for California:  here, the property owner has no personal liability for the tax.

Property taxes are a charge on the property, however.  The county’s lien is senior to the mortgage lender’s lien.

Taxes have to be at least five years delinquent before the county will consider a sale of property for unpaid taxes.

And most likely, your mortgage lender will advance the money to pay property taxes rather than risk a tax sale.

Can I get rid of taxes in bankruptcy?  

I thought you’d never ask!  Yes, income taxes for which an honest return was filed and sufficient time has run (roughly three years from when the return was due) are dischargeable in bankruptcy.

The discharge of taxes has lots of twists and turns, so you need careful bankruptcy advice, but bankruptcy will eliminate the personal liability for income taxes.

Foreclosure And The Tax That Follows: What You Must Know

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dollar-163473_1280The homeowner did the right thing:  faced with the threat of foreclosure, he called his tax professional in advance.

He did the right thing that nearly produced the exceedingly wrong result.

Because the tax pro asked the wrong question and  got the wrong result.

The illusion of professional advice about taxation upon foreclosure almost cost my client a bundle.

Once we dispelled the illusion and got to the real law, an emergency bankruptcy filing was in order.

Cancelled debt treated as income

The standard tax rule is that debt that is forgiven, settled or cancelled triggers potentially taxable income to the person who owed a debt.

The IRS recognizes at least two exceptions to the inclusion of cancelled debt in the taxpayer’s income:  insolvency and bankruptcy.

When the client decided to let his rental property go to foreclosure, he called his accountant about the tax issue.

The accountant asked him if his debts exceeded the value of his assets.

The client’s affirmative answer produced a “don’t worry” about cancellation of debt income from the accountant:  “You are protected by the insolvency exception to taxation.”

Only the  DIY analysis was defective.

Insolvency isn’t so simple

Trust the IRS to have a test for insolvency that isn’t the same as the usual test.

The IRS’s insolvency test in these circumstances includes retirement assets usually excluded from balance sheets.

It isn’t just the obvious assets that are included.  Retirement funds, including classic pensions and disability payments are certainly not  “assets” a layman can be relied on to recognize.

This  client had a comfortable disability income and, had he accepted the  reassurances of his tax professional, Monday’s foreclosure would have yielded a hefty tax bill.

Bankruptcy shields filer from that tax

Instead, we’ll be filing a bankruptcy case, since discharge in a case under Title 11 (bankruptcy) is the other, often invoked exception to inclusion of forgiven debt in income.

The discharge in bankruptcy provision only works if the bankruptcy filing occurs before the foreclosure or short sale.  There’s no retroactive application of the bankruptcy king’s X.

Had my client relied on the accountant’s call and let the foreclosure proceed before filing bankruptcy, the tax would have landed on his return.

And once the personal liability for the mortgage debt is discharged in bankruptcy, it doesn’t matter how much time elapses before the eventual foreclosure or sale.  The subsequent foreclosure doesn’t forgive any debt:  the borrower’s personal liability was forgiven long ago, by the bankruptcy.

Morale of this tale:  question any tax professional who gives you a quick answer that no tax results without real analysis.

More on taxes on foreclosure.

Disputing the erroneous 1099

Image courtesy of  Pixabay and PublicDomainPictures.

 

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

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