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Unfiled Taxes: A Life Sentence

Unfiled Taxes

We have a long and unpleasant relationship with taxes in this country.  We literally fought the most powerful country on earth over a few pennies tax on some tea and paper.  In life though, there are two certainties.  You will die and you will definitely pay taxes. The longer you wait to handle this reality, the longer you wait to get relief.  Unfiled taxes are a life sentence.  

Tax debt can be overwhelming and unfiled taxes just make it worse.  This is especially true if you happen to have something go wrong with your job or your business.  People hold off filing their taxes for a number of reasons and at the time, many of them seem to make perfect sense.  There is a problem with that though and it can be very costly.  

Bankruptcy can discharge many kinds of old tax debt.  It’s one of the best tools you can use to combat the IRS and their seemingly unlimited desire to squeeze every penny out of you that they can.  But there’s a catch.  You have to file your tax returns.  

Unfiled tax returns turn your ability to discharge those old debts upside down.  Below, I’ll outline two different scenarios that I’ve dealt with in the last month.

Filed, On time tax returns

My first client came to see me.  He owed $91,500 to the IRS in back taxes.  He certainly didn’t have that kind of money and he was stuck between a rock and a hard place.  But, he had filed his return on time, complete and accurate. 

The second client had a different situation.  She owed $65,000.  She also didn’t have the means to pay that, but she was in way more trouble than my first client.  She had unfiled taxes dating back nearly a decade.  

The first client I can help…today. The second client is going to have to keep treading water for two more years before I can help her.  

You’d think that the second client would be better off, but you’d be wrong.  The golden rule in bankruptcy when it comes to taxes is… you can’t discharge tax debts that you haven’t filed a return on. 

Bankruptcy eliminates some taxes

You can discharge most taxes in bankruptcy. While taxes are a big deal, if you handled your obligations correctly, your old taxes can be eliminated in bankruptcy.  You just have to file your return and let the clock start ticking.  

Even if you can’t file bankruptcy on your taxes, there is a statute of limitations on collecting taxes, but that doesn’t start until you actually file the return.  

The 2 year rule

In order to qualify for the two year rule you’ve got to adhere to the policy.  To get a tax discharged, the return must be on file with the IRS for at least 2 years before the bankruptcy case is filed.  Extensions move the starting point, so avoid them if you can.  Here’s an example:

  • If you get an extension until July 15th, that’s your start date.  Even if you ultimately file your taxes on April 21st. 
  • If you don’t get an extension and you file on June 1st, you start counting the day you filed, June 1st. 

 

Always be aware of filing dates that fall on weekends or holidays.  April 15th is typically the “last day to file without penalty” but that can change from time to time. 

Unfiled taxes

My client who hasn’t filed in a decade is in a precarious situation.  She is looking at retiring in the next 5 years.  Very few creditors can get their hands on Social Security benefits.  The IRS can. 

We have to get the clock ticking on discharging those taxes. It’s going to take a lot of leg work on the part of this client.  They’ll have to find W-2s and other income reports.  They’ll likely even have to contact the IRS for a list of reported income that they have.  However, they’ll be able to file a return.  

This will get the ball rolling, but it would have been better to do things the right way from the start.  This person would be gliding into the last few years of working, footloose and fancy free.  Instead, they’re like David, trying to hold off the biggest Goliath of them all, the IRS. 

Unfiled taxes can ruin your life.  If you’ve gotten yourself into a situation that you can’t seem to get out of without help, call us.  Let our attorneys take a look at your situation to see how we can help.  Our consultations are always free.  You literally have nothing to lose. 

Crushing Tax Penalties In Bankruptcy

I often tell people that in the grand scheme of government bureaucracies, the scariest one isn’t the usual suspects.  Sure, some people think they need to worry about the FBI or the NSA…maybe even the DEA or the CIA, but they’re wrong.  

The scariest and most dangerous organization within the federal government isn’t one of those aforementioned groups (unless you’re a drug dealer or mafioso).  It’s the IRS.

The IRS has the ability to garnish your wages, put liens on your home and other property.  Seize your bank accounts and pile on tons of interest and penalties to unpaid taxes. Let’s be honest.  When you’re already having trouble paying the taxes, the penalties are just adding insult to injury.  

There seems to be a penalty for everything.  Failure to file in a timely manner, failure to prepay your taxes,  failure to be completely accurate.  All of these penalties add up quickly, oftentimes dwarfing the actual amount of the unpaid taxes themselves.  

The good news is, bankruptcy can not only eliminate your liability for certain taxes, it can wipe out the tax penalties as well.

Too good to be true…think again.

The rules for discharging tax penalties

Penalties for dischargeable taxes are dischargeable

A tax penalty is always tied to a particular filing year.  If the tax for that year is able to be discharged in bankruptcy, the penalties are dischargeable as well. 

The way this work is as follows:

  1. The return for that  year was due more than three years before the bankruptcy was filed. 
  2. The return was preferably filed on time but if it wasn’t, it’s been on file for at least two years.
  3. The tax for that year was assessed at least 240 days before the bankruptcy.

If you meet his formula, the tax is dischargeable and so is the penalty. 

A Penalty related to events more than three years old is dischargeable.

If the penalty is triggered by a failure that was more than three years old, the penalty is dischargeable.  It’s even dischargeable in cases where the tax for that year is not dischargable…even if you didn’t file the tax return on time.

Don’t believe me, see 11 U.S.C. 523(a)(7).

All tax penalties can be wiped out in a Chapter 13

Yep, that’s true.  All tax penalties are discharged by a Chapter 13. 

That’s a deal that’s almost too good to be true.  

While a Chapter 13 bankruptcy does require that you pay all priority taxes in full along with all the interest that accrued before you filed your case, in the end all the penalties are wiped out, even on the priority taxes.  

Lots of rules

Discharging tax debt is complicated.  That’s why so many bankruptcy attorneys are reluctant to do it, they just don’t know their way around the rules.  

We do. 

We get the tax transcripts and verify all the important dates and transactions. We follow up with your accountants and we work directly with the IRS and state department of revenue. 

When it comes to tax problems, get experienced legal help. Otherwise you may not be able to successfully discharge taxes and tax penalties.  This isn’t the time to go with the TV lawyers or the “$0 down” kooks.  Bring in the big guns and set yourself up for success.  Call us today if you find yourself in major trouble with taxes. 

 

Taxes, Taxes…Taxes

Unfiled Taxes

It’s that time again in America.  The final deadline for filing your taxes looms large. People who got extensions will have to file their taxes by October 15th and that day looms large for those who owe.  You’ve done your taxes and gotten to the bottom line.  You owe… way more than you have in your bank account.  

So…what now?

File your taxes anyways.  

The IRS, horrible as they are, won’t start harassing you for money on April 16th or July 16th or even October 16th.  They likely haven’t posted the returns that have been filed yet, especially in years like this with COVID lurking in office buildings.  

There are serious advantages to filing your return, even if you don’t have the money to pay right now.  In fact, filing your return and starting the clock has way more advantages than hiding behind the fact that you don’t have the money to pay.

Payment plans available

The number one thing you can do is send in what you can.  It lowers your tax debt and the penalties and interest that will accrue on that debt from the word go.  Look, the IRS is greedy.  They just want your money and they want all they can manage to get from you.  That’s how the government is.  Send them what you can, when you can.  You don’t have to enter into an installment agreement with the IRS.  Just make sure that when you send in your payments, you notate your social security number, name and what year you want the money to go to on your check. 

If you’re really in need (for whatever reason) of a formal payment plan with the IRS, you can set one up online so long as you owe less than $50,000. 

Additional penalties for failure to file

If you don’t file a tax return and don’t get an extension, you’ll be up the creek without a paddle. You’ll be smacked with a separate penalty for failure to file the return.  That’s on top of the penalty you’ll pay for failure to pay as required.  Trying to hid from the IRS is way more expensive than doing the right thing. 

Filing returns starts the clock

On the escape option that is.  Taxes aren’t eternal.  Yes, I said that and it’s true.  Taxes can go away after time.  There is a statute of limitations on taxes that can make them uncollectable. 

There’s also the silver bullet, Bankruptcy. 

Bankruptcy law allows you to discharge certain taxes that are of a certain age before they can even expire.

But there’s a catch.  You have to file.  The clock doesn’t start ticking until you file your tax return.  That’s why filing, even when you can’t pay, is supremely advantageous.  

You need to adjust your withholdings

The final reason why you need to get last year’s return ready is that you need to get your withholding right for this year.  Even an extension can cause problems because it delays your ability to adjust your withholding on your W-4 to account for the fact that you owed this year.  You want to adjust your withholding so you don’t have to pay out of pocket again next year when everything is said and done.  

The bottom line is, hiding from a problem isn’t going to make it go away.  Especially if that problem is with a government agency as nasty as the IRS.  If you owe back taxes and you can’t pay them, contact the attorneys at Harmon and Gorove to see how bankruptcy can help you get a handle on your tax debt.  We have a dedicated team of professionals that understand your rights under bankruptcy and how they can help eliminate tax debt.