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All posts by Larry Heinkel

Sometimes bankruptcy is the best path forward.

Sometimes Bankruptcy is the Best Path Forward

Why I Am Sharing This Information with You

Before I give you an overview on bankrupting taxes, I first want to share with you why I am providing free tax resolution advice to bankruptcy attorneys. I would ask the same question. There are three reasons:

1) Referrals. My firm primarily works with tax problems of all types and sizes, not just where bankruptcy is the answer. Further, my firm does not handle bankruptcy matters (other than advising WHEN someone could file bankruptcy to discharge tax debts). These types of cases require the experience of someone like me. If you get a client who has a large tax debt (or unfiled tax returns or any kind of IRS problem), I would like for you to think of me.

2) Avoid Malpractice: About 10-years ago, I hired a software developer to design and construct a software tool for my practice. A full-proof tool that would assess, in less than two-minutes, whether a taxpayer’s debt is dischargeable in bankruptcy. And protect me and my firm from any potential malpractice harm. The software works so well, I decided to offer it to accountants and bankruptcy attorneys. Almost three thousand attorneys and accountants across the country use Tax Discharge Determination software, not only to avoid malpractice, but to make additional revenue. It is fast, accurate, inexpensive and a money maker! Try TDD for free!  www.TaxDischargeDeterminator.com

3) Referrals for you: We get clients all over the U.S. When the circumstance is right, we recommend bankruptcy. Therefore, I want to have a list of qualified bankruptcy attorneys to whom we can refer these cases.

Bankrupting Taxes

Often when people come in with tax problems, they have a whole host of other financial problems such as failed businesses, loans they have guaranteed, and judgments from lawsuits. Sometimes bankruptcy is the best way out. Sometimes it is cheaper and easier to simply wipe the whole slate clean. The tax is gone, the other creditors are gone, the judgments are gone, everything. While bankruptcy is not the best option for many taxpayers, you should know how to use it for those times when it is the right solution to resolve tax debts.

Under bankruptcy, there are six basic rules for discharging an income tax:

  1. Three-year rule
  2. Two-year rule
  3. 240-day rule
  4. No fraud
  5. No trust taxes
  6. No SFR (Substitute for Returns)

For the income tax of a particular tax year to be dischargeable in bankruptcy, the taxpayer must meet all these rules. Under the three-year rule, the tax year in question must be at least three years old. For example, if the 2010 tax return were due on October 15, 2011, the three-year rule would not be after October 15, 2011. The two-year rule states that a return must be filed at least two years prior to the bankruptcy filing. And if there was an additional assessment on the return, like an audit or an amended return, any additional tax due from the adjustment must be at least 240 days old. If the client meets these three requirements, the income tax may be dischargeable in bankruptcy.

The TDD Tool Covers All Your Needs When Advising Your Clients About Bankrupting Taxes

Be on notice that these rules may be suspended or “tolled” if the taxpayer filed a prior bankruptcy, filed a timely request for a CDP Hearing, or filed an Offer in Compromise. This gets tricky. Luckily, however, if you are armed with official IRS Account Transcripts and use TDD www.TaxDischargeDeterminator.com all these tests, deadlines, and tolling will be taken into account so you can sleep at night when advising your client whether the taxes will be discharged.

In addition to meeting the three above rules, the client must not have committed civil or criminal fraud. If there is a fraud penalty, you cannot discharge the tax (although interestingly the fraud penalty itself can be discharged!).

Likewise, a trust tax cannot be discharged. These include any taxes the taxpayer has collected on behalf of the government such as payroll taxes, federal liens, state withholding or sales tax, or an excise tax.

SFR stands for Substitute for Returns. If the client has not followed the law by keeping up with his or her tax compliance, the amounts owed on a government-created substitute return will not be dischargeable under bankruptcy.

IRS Collections Division

Dealing with the IRS Collection Division requires attention to detail and tenacity. And you must know all the rules and foot faults, like being a Grand Master at chess. Armed with a complete picture of your client’s financial situation and a good grasp of the tax laws, you will be able to help your clients resolve their tax problems in the way best suited to their unique situations.

Here at TaxProblemSolver.com, we handle tax resolution in three phases:

Phase 1: Investigation/discovery, transcript analysis.

Phase 2: Insuring Compliance, which means tax return preparation for all past years, and instruction and training on maintaining compliance in the future.

Phase 3: Resolution, which can encompass six (6) main options for resolving a collection case.

  1. Offer in Compromise
  2. Installment Agreement or Partial Pay Installment Agreement
  3. Currently Not Collectable
  4. Penalty Abatement
  5. Statute of Limitations
  6. Bankruptcy
  7. (there are other, minor but important options depending on the facts, such as Audit Reconsideration; Tax Court; Innocent Spouse; Equitable Relief; Discharge Tax Liens; etc.)

Requesting Taxpayer Transcripts

Definitions:

An Account Transcript shows a balance due, when the return was filed, when it was processed, when (and the amount of) a subsequent tax assessment was made, and several other “events” in the life of that tax year such as the filing of an Offer in Compromise, etc. This is what is needed to use TDD.

A Return Transcript (or Transcript of Return) reflects the actual tax return for that year. How much was reported on various lines on the tax return, etc. This is not the type of transcript you need for TDD. (Return transcripts are only available for the last four filed years).

For you to obtain your client’s Account Transcripts, you will either need to hire a third-party service (such as Tax Discharge Determinator – https://www.taxdischargedeterminator.com/order-transcripts ) or follow these instructions very carefully.

GETTING THE CLIENT’S AUTHORIZATION

  1. You will need to get either a Power of Attorney (form 2848) or a Tax Information Authorization (form 8821).  The former allows you to “represent” the taxpayer; the latter does not, it only allows you to obtain information about the client.
  2. We recommend at this stage of your engagement you simply go with the form 8821 so you are not “engaged” for IRS representation.  Go to: https://www.taxdischargedeterminator.com/content/docs/form8821-2020.pdf to download the form 8821.
  3. Box 1 is for the taxpayer’s complete, legal name; home address (as last reported to IRS if not current address), and SSN (do not put Daytime phone number of Plan number in the area).
  4. Box 2 is for your name and address. You do not need to put anything in CAF or PTIN areas. Do put your phone and fax numbers.
  5. Do not change the information provided in Box 3. Be sure the checkmark is there for “I authorize access…”.
  6. Leave Boxes 4 and 5(a) blank.
  7. Do Not Check Box 5(b).
  8. Have your client sign his or her full, legal name and date it. Print the full, legal name where indicated.

OBTAINING THE IRS ACCOUNT TRANSCRIPTS

  1. Call the Practitioner Hotline at 866-860-4259. Hold times usually are not that bad but early in the morning may be best.
  2. Dial “2” for individuals; dial “4” if your client is “in collections” now.
  3. You will need to tell them you want a “compliance check” and request Account Transcripts. Ask for their fax number so you can fax the form 8821.
  4. You will have to go through “disclosure” not only about the client’s information but yours as well. They will ask you your SSN and date of birth, to verify you (on the phone) are the same as the person in Box 1 of the 8821.
  5. After “disclosure”, find out if there are any years that are not filed. If so, ask for “wage and income” information to be sent to you.
  6. Also, ask what years the taxpayer owes for (called a balance due or “baldue”). Ask what the collections statute of limitations (“CSED”) is for each year (in case one or more is about to expire).
  7. Ask that they send you Account Transcripts for each year with a baldue (balance due).
  8. If you have an IRS e-services account, ask them to send the wage and income information and the Account Transcripts to your e-services account for you to access later.
  9. If you do not have an IRS e-services account, either consider getting one (which is not an easy process), or you will need to have the requested information mailed to your client (you can ask that they mail it to you; they might, they probably will not).
  10. When you get the Account Transcripts from your client, you are ready to use TDD.
  11. The wage and income info are needed if you find the client cannot yet file bankruptcy due to having too many unfiled returns and you want to get them filed, negotiate an installment agreement, and file the bankruptcy when they are dischargeable (AT LEAST two years later).

What to charge?

We typically charge $450 for transcripts. Once you have the transcript, you can use a tool like Tax Discharge Determinator to determine if your client’s tax debt is dischargeable now or when. You may need to negotiate an installment plan with the IRS for your client (additional revenue for you), then at a certain point then file. This is how you avoid malpractice. Depending on the tax debt liability, we charge $1,250 to $6,500 for Installment agreements…you can too.

In summary, I know this is a lot to take in, but this is where it starts. For my Tax Discharge Determinator users, I help guide them through the process.

It is a Good Time to Learn Tax Resolution

Right now, the national debt is approaching $28 trillion, and there is no end in sight. Once the COVID crisis is subdued, Congress will look to the IRS to step up collections. Individual taxpayers and small business owners are their primary targets. It is a good time for you to learn how to handle tax debt situations in your practice and you keep the revenue.

To learn more about Tax Discharge Determinator and to take advantage of a free trial, click here. If this article raises any issues or questions that you’d like to discuss about bankrupting taxes – or if you have any questions about the TDD tool in general, please feel free to email me at larry@taxdischargedeterminator.tax or you can call me at 833-879-9210.

Eliminating Income Taxes In Bankruptcy (Part 3)

Eliminating Income Taxes In Bankruptcy (Part 3)

Should My Client File for Bankruptcy Before or After Taxes?

They won’t gain any real advantage by waiting to file their income tax return until after filing a bankruptcy case. But, there are many reasons you’ll want your clients to be current when filing their Chapter 7 or Chapter 13 bankruptcy case.

Tax Returns and Chapter 7 Bankruptcy

When your client files for Chapter 7 bankruptcy, the trustee assigned to oversee their case will ask for their most recently filed tax return. That doesn’t necessarily have to be the tax return for the last tax year, but if it isn’t the most recent return, the trustee will ask for a written explanation.

The trustee will compare the income reported on their return to the amount listed in their bankruptcy paperwork. If they show that they’re due a refund, the trustee will also want to check that they have the right to protect (exempt) it and that the proper exemption amount has been claimed. If not, they would be required to turn the refund over to the trustee, who would, in turn, distribute it to your client’s creditors.

Many people plan to use the return for necessary items—such as living expenses—before filing a bankruptcy case. If they choose this approach, it’s a good idea for your client to keep records of his or her expenditures.

Tax Returns and Chapter 13 Bankruptcy

Your clients must be up to date on their tax returns before filing a Chapter 13 case, but the rules allow a little wiggle room. They will need to provide copies of the returns for the previous four tax years to the Chapter 13 trustee before the 341 meeting of creditors (the hearing that all filers must attend). If they are not required to file a return, their trustee might ask for a letter, an affidavit, or a certification explaining why. Sometimes local courts will impose additional rules for documents in their districts.

If your client owes the IRS a return but doesn’t file it before your 341 meeting of creditors, things can happen to derail their case.

  • A motion. The trustee will file a motion giving them a very brief period to provide their returns. If they miss the deadline, the court can automatically dismiss their case, leaving you no chance to plead their case to the judge.
  • A substitute return. The IRS might file a “best estimate” claim based on your client’s past income. The problem? IRS estimates are almost always higher than what they would owe after filing a proper return.

As you can see, the rules governing the discharge of tax debts in bankruptcy proceedings can be quite complex. With the information using the TDD tool will provide, an experienced bankruptcy attorney can determine if their clients can discharge their income tax liability and whether other options may be available in their specific cases.

This is the last of a 3-part article on eliminating income taxes in bankruptcy. Parts 1 and 2 have been featured in recent TDD newsletters (you can click here on part 1 and part 2 to revisit the articles). If this article raises any issues or questions that you’d like to discuss – or if you have any questions about the TDD tool in general, please feel free to email me at larry@taxdischargedeterminator.tax or you can call me at 833-879-9210.

The TDD tool helps you discharge your clients' debt in bankruptcy

Eliminating Income Taxes In Bankruptcy (Part 2)

You Can't Discharge a Pre-Existing Federal Tax Lien in Chapter 7 Bankruptcy

If your client's taxes qualify for discharge in a Chapter 7 bankruptcy case, the victory may be bittersweet. Why? Bankruptcy won’t wipe out prior recorded tax liens. Chapter 7 bankruptcy will wipe out a personal (in personam) obligation to pay the qualifying tax and prevent the IRS from going after your client's post-petition wages. But if the IRS recorded a tax lien on their property before the bankruptcy filing, the lien will remain on the property (what we refer to as “in rem” liability, the liability remains attached to “the thing” (the property)).

If your client is willing to surrender the property to the trustee or the IRS, then maybe you and your client don’t care. But if you do care, here are some things to know:
  • In many cases, the Insolvency Unit will simply release the lien sua sponte (on its own). You should wait about 60 days post-discharge then contact the Insolvency Unit at 800-973-0424, ask them to confirm the taxes were discharged, and inquire if they will be releasing the liens.
  • If not, you can negotiate a buy-out of the lien with the Insolvency Unit. The author’s experience is that the IRS will frequently release the lien for 10-15% of the equity in an asset if it is an asset that would be “exempt” in bankruptcy (such as homestead equity, IRAs, etc.). Why? Because the IRS knows it’s unlikely to seize that property anyway. However, experience shows that this may work best when the case is still assigned to the Insolvency Unit so do not wait for the case to leave the Insolvency Unit and go back to the Collections Division.  

If neither of these approaches works, the other option is just to live with the lien. Typically, that would be a lien on the home. The statute of limitations on collections will expire (generally) ten years from when the assessment was made plus the entire time the debtor was in bankruptcy, plus 6 months (there are other tolling rules as well). So, as long as your client does not sell or refinance the property before the SOL expires, the lien won’t affect the property. Once it expires, the lien will expire and the client is free to do whatever he or she wishes with that property.

Managing Tax With Chapter 13 Bankruptcy

Managing the filing of your client's tax return might not be as burdensome as it seems, once you realize that using Chapter 13 bankruptcy to manage their tax debt can be a smart move. Here’s why:

  • Dischargeable taxes (generally those due more than three years ago for which returns have been filed more than two years ago) might be forgiven without any payment at all, depending on the amount of disposable income you have after your reasonable and necessary expenses are deducted from your pay.
  • Dischargeable taxes won’t incur additional interest or penalties (but you’ll pay interest on nondischargeable tax).
  • Your clients can satisfy an IRS tax lien through the Chapter 13 plan.
  • The IRS is obligated to abide by the plan as long as you include all of their outstanding income tax and they keep their tax returns and post-petition tax obligations current during their Chapter 13 plan.

Bear in mind that any non-dischargeable tax debts ("priority”) taxes that won’t go away in bankruptcy must be paid in full during the three- to five-year Chapter 13 plan. When it’s over, your client will be caught up on taxes and most or all of their other debts.

Unlike Chapter 7, in Chapter 13, you can discharge a credit card balance incurred due to paying off a nondischargeable tax debt.

This is the second part of a 3-part article on eliminating income taxes in bankruptcy. Part 3 will be featured in the next TDD newsletter. I hope you're finding this material helpful and useful. If this article raises any issues or questions that you'd like to discuss – or if you have any questions about the TDD tool in general, please feel free to email me at larry@taxdischargedeterminator.tax or you can call me at 833-879-9210.



The TDD tool helps you discharge your clients' debt in bankruptcy

Eliminating Income Taxes In Bankruptcy (Part 1)

Most taxes can't be eliminated in bankruptcy, but many older, unsecured income taxes can be.

If your clients have heard commercials offering the hope of eliminating tax debts in bankruptcy, make sure to alert them that it's not as simple as it sounds. Most tax debts can't be wiped out in bankruptcy—they'll continue to owe them at the end of a Chapter 7 bankruptcy case or have to repay them in full in a Chapter 13 bankruptcy repayment plan. In this article, I'll discuss:

  • when you can discharge a tax debt
  • what happens with federal liens, and
  • how to manage tax debt using Chapter 13.

You’ll also read about the pros and cons of filing tax returns before or after bankruptcy.

When You Can Discharge Tax Debt

If you need to discharge tax debts, Chapter 7 bankruptcy will be the better option—but only if the tax debt qualifies for discharge (not all do) and your client is eligible for Chapter 7 bankruptcy. All of these conditions must be met before you can discharge (wipe out) federal income taxes in Chapter 7 bankruptcy:

  • The taxes are income taxes. Taxes other than income, such as payroll taxes or civil penalties (e.g. Trust Fund Recovery Penalties), can never be eliminated in bankruptcy. (Well, the non-trust fund portion of an unincorporated employer (e.g. a sole proprietor) can be discharged if the other tests are satisfied).
  • They did not commit fraud or willful evasion. If your client filed a fraudulent tax return or otherwise willfully attempted to evade paying taxes, such as using a false Social Security number on their tax return, bankruptcy can't help.
  • The return was “due” at least three years ago. The tax return must have been originally due (including extensions) at least three years before filing for bankruptcy, regardless of when the return was actually filed.
  • Your client filed a tax return. They must have actually filed a tax return and it must have been filed at least two years before filing for bankruptcy. (In most courts, if a late return is filed (meaning the extensions have expired and the IRS filed a substitute return on their behalf), they have not filed a "return" and cannot discharge the tax. In some courts, you can discharge tax debt that is the subject of a late return as long as your client meets the other criteria.)
  • Your client passes the "240-day rule." The IRS must have assessed the income tax debt at least 241 days before a bankruptcy petition is filed, or not at all. (This time limit could be extended if the IRS suspended collection activity because of an offer in compromise.)

Some jurisdictions have additional requirements, too. For instance, in the First, Fifth, and Tenth Circuits, a tax return must be filed in a timely fashion. Filing late, even one day late, precludes a discharge automatically. This is known as the McCoy Rule but the good news is, the IRS does not follow the McCoy Rule so you only have to worry about the McCoy Rule for discharging state income tax debts.

Last, we recommend you not file an Adversary Proceeding seeking a court order that the taxes were eliminated. Rather, wait 60 days after the Discharge is entered and then call the Insolvency Unit at 800-973-0424, confirm they acknowledge the tax debts were discharged, and that the lien will be released. Ask for updated Account Transcripts to be sent to your client showing “zero” balances due. You might need a form 2848 to do this (available at IRS.gov).

This is the first part of a 3-part article on eliminating income taxes in bankruptcy. Parts 2 and 3 will be featured in upcoming TDD newsletters. If this article raises any issues or questions that you'd like to discuss – or if you have any questions about the TDD tool in general, please feel free to email me at larry@taxdischargedeterminator.tax or you can call me at 833-879-9210.