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:

Three-year rule
Two-year rule
240-day rule
No fraud
No trust taxes
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.

Offer in Compromise
Installment Agreement or Partial Pay Installment Agreement
Currently Not Collectable
Penalty Abatement
Statute of Limitations
Bankruptcy
(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

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.
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.
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).
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.
Do not change the information provided in Box 3. Be sure the checkmark is there for “I authorize access…”.
Leave Boxes 4 and 5(a) blank.
Do Not Check Box 5(b).
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

Call the Practitioner Hotline at 866-860-4259. Hold times usually are not that bad but early in the morning may be best.
Dial “2” for individuals; dial “4” if your client is “in collections” now.
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.
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.
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.
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).
Ask that they send you Account Transcripts for each year with a baldue (balance due).
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.
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).
When you get the Account Transcripts from your client, you are ready to use TDD.
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.

About the Author Larry Heinkel

As a tax law expert, I speak nationally via seminars and webinars to CPAs, Bankruptcy Attorneys about tax debt resolution and bankruptcy. I aim to instruct my audiences on how they can add to their bottom line by adding tax debt solutions to their practices. For bankruptcy attorneys, I created Tax Discharge Determinator, an affordable, easy-to-use, online tool to determine when tax debts are dischargeable in bankruptcy. They can avoid malpractice and create a new revenue stream.

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