Arizona Tax Resolution and Bankruptcy Blog

Contemplating an IRS Offer in Compromise? 6 tips that will help your cause

Fri, 12 Apr 2013 06:43:16 -0700

If you have IRS tax debt, I don't care what you say, you have been contemplating an IRS Offer in Compromise.

You are searching the internet, reading every article you can find. You have probably spoken to a few tax "resolution" companies to get a sense of fees and process.

A basic understanding about how the IRS offer program works is easy to find, so here are a few things that you may not be aware of that will increase your chances of successfully completing an Offer.

1. Make sure you are currently withholding enough tax

If you are self-employed, you must make sure that you are making your quarterly payments correctly. If you are a wage earner, you should do a "fake" tax return and make sure you are withholding enough from each paycheck to guarantee you won't owe when you file the return next year.

If you don't make sure you are current, the Offer will be rejected. The IRS will think that the problem will continue and that you just can't follow the rules.

2. File all tax returns that need to be filed

If a return is missing from your history and the IRS is looking for that return, it won't consider the offer in compromise until the return appears in its basket.

You must find out which returns are missing, which returns the IRS cares about, create them and file them.

3. Prove your Case

I know...paperwork is a real pain. The key to a successful Offer is paperwork though. So you need to "bear down" (the strange motto of the Arizona Wildcats down south) and gather proof of almost every budget item and income source you are using to make the argument.

You will need at least 3 months and sometimes more of each required item.

Get to work.

4. Honesty

Dishonesty with the IRS is dangerous for reasons other than a lost Offer in Compromise. The financial statement you are filing is being provided under oath and you are subject to perjury charges if you intentionally leave something out or place something in that is false.

The other problem with over-manipulation of the data is that it something won't make sense when the IRS looks at the big picture.

A common example of this is when the Offer filer provides a budget that is higher than her income. Either the calculation is wrong or something is rotten in Denmark. The IRS will figure out that someone isn't disclosing income from a side job and the case blows up or worse.

I tell my clients, "the financial statement has to make sense".

The IRS is used to seeing financial statements and its employees can smell a rotten story from a few miles away.

5. Determine whether or not the debt would be dischargeable in bankruptcy

The IRS is required to consider the fact that it may get less if it rejects the offer and you file for bankruptcy. We will often work up a complete bankruptcy case and present it to the IRS during the Offer. This shows the IRS exactly what it will get if you file.

The IRS will ponder this deeply.

6. Cooperate

I know that the situation is aggravating and you will be working with government employees who are part of a giant miserable machine. Most of them know it and are aware as well that you have been waiting months to get the situation resolved.

It will help your case as a result to simply...cooperate. Provide stuff. Explain stuff before it needs explaining (with the advice of counsel preferably).

If the person you are dealing with senses that you are a nice person and just want the law to provide you a way to move on with your life, it should...play in your favor.

THE IRS FROZE MY BANK ACCOUNT - WHEN CAN I START USING IT AGAIN?

Fri, 05 Apr 2013 06:40:27 -0700

A common concern once the IRS Levies or "freezes" a bank account is whether it will remain in place as to all future deposits. In other words, can the frozen account still be used to make deposits and pay bills?

The good news is that the IRS Bank Account Levy only freezes the money that was in the account at the time the levy was processed.

If you have $500.00 in the account tomorrow and the levy is fully processed tomorrow, the bank will freeze $500.00.

If the next day you make a deposit of another $500.00, that money is your own and the bank should not freeze it. The levy was complete when first $500.00 was frozen. The IRS would have to issue another levy.

If someone asks you, the same question above then your answer is..."An IRS levy is not a continuous levy on your bank account".

The follow up question is whether or not the IRS will issue another levy on the bank account?

One after another isn't common, but...it could happen and I tell clients to just get the situation worked out so that all collection activity is stopped.

It is also important to know that when the bank freezes the funds, it must hold them for 20 days before mailing the dollars to the IRS. This provides some time for you to try and get the money placed back into the account.

In the end, the IRS is really just trying to rattle your cage when it grabs a bank account. If you have a serious tax debt and have been hit, you need to use the levy as extra motivation to get the entire situation analyzed and solved via a negotiated plan, offer in compromise or even bankruptcy.

LIVE IN ARIZONA AND HAVE SERIOUS TAX DEBT? DIONNE WARWICK'S BANKRUPTCY FILING CONTAINS IMPORTANT LESSONS

Wed, 27 Mar 2013 11:11:03 -0700

More than 1 million people each year file for bankruptcy in the United States. That number always incudes some famous types. Yes famous and "important" people use Bankruptcy. In fact many people are shocked when they see the long list. My list of favorites include:

President Abraham Lincoln
Walt Disney
Henry Ford
President U.S. Grant
Jerry Lewis
Johnny Unitas (yes I know..even Unitas)
Ted Nugent

Dionne Warwick has recently joined the list. You can read more about her bankruptcy filing here.

Ms. Warwick filed her Chapter 7 Bankruptcy case in New Jersey. Some important and interesting disclosures at least for our purposes...include the following:

Assets

Artwork $5000.00
Gowns and Clothes $5000.00
Fur Coats and Diamonds $13000.00
Pension Plan unknown

Income

Wages $5000.00 per month
Social Security Income $2200.00 per month
Pension $14000.00 per month
Royalties $1000.00 per month

Partial Budget

Rent $5000.00 per month
utility costs $2100.00 per month
home maintenance $1000.00 per month
Laundry and Dry Cleaning $750.00 per month
Transportation costs $1000.00 per month
House keeping $5000.00 per month
Personal Assistant $4000.00 per month

Debt

She listed more than $10,000,000.00 in debt, mostly owed to the IRS and the State of California. Much of it more than 15 years old.

I have a copy of her bankruptcy schedules which are public record. (If you want to see her bankruptcy schedules, email me and I will send you a copy)

The schedules are interesting to a boring attorney who deals with debt problems for a living, but they should also be of great interest to anyone in Arizona who has serious tax debt.

There are a number of reasons why:

1. Income Tax Debt and some other types of tax debt are dischargeable in Bankruptcy

I find myself repeating this on a constant basis. YES...the obligation to pay income tax debt can be discharged or wiped away as a result of a bankruptcy filing depending on the "circumstances".

The basic circumstances are those related to dates. The tax debt in question has to be based on a tax return that was:

a. due to be filed more than 3 years before the bankruptcy filing
b. actually filed by the person and not the IRS more than 2 years before the bankruptcy
c. assessed or entered into the IRS' books more than 240 days before the bankruptcy filing

The point...? If the tax debt meets the criteria for discharge, bankruptcy has to be considered. Ms. Warwick considered it.

2. IRS Offers in Compromise Don't Often Work

Whenever serious tax debt exists, the question immediately becomes... will the IRS settle the tax debt for less than what I owe? For some people yes...for most people no. There are a number of reasons why. The basic explanation as to why many people don't qualify for an Offer in Compromise is as follows:

Whether you meet the initial criteria to settle tax debt depends on a set of rules. Negotiating an Offer in Compromise isn't like trading a horse for 3 bags of seed.

The first rule is that your excess income plus your assets cannot be large enough to pay the tax debt over the time remaining in the statute of limitations period for collection of the debt.

The IRS has 10 years from assessment to collect the debt. That 10 years can be extended for any number of reasons. The clock doesn't start to run until the assessment date which is often delayed because the returns aren't filed on time. Time in tax court, time in certain appeals, prior offers, prior bankruptcies all extend the 10 year clock as well. Some of this probably explains why Ms. Warwick's IRS debt is so old and still in existence.

The second rule is that the IRS gets to use a budget to calculate the excess income that is it's own...and not necessarily Ms. Warwick's real budget

There are other rules that govern how the actual offer amount is calculated...but these two rules weed lots of people out... all by themselves.

AND...even if the IRS imposed excess income number will leave less than the total debt over the remaining life left in the statute period, the IRS can reject the Offer for other reasons and they do it all the time. You will notice that some articles about her Bankruptcy mention her inability to make a deal with the IRS.

3. What you earn and spend...shouldn't matter in an Arizona Chapter 7 Bankruptcy if the majority of your debt is tax debt

Bankruptcy law limits your allowable budget in an effort to determine how much you can afford to pay your creditors, much like the IRS does when you file an Offer in Compromise.

Many people fail this "Means" test. Ms. Warwick would not have qualified to file a chapter 7 bankruptcy either IF her debt were mostly credit card, mortgage and other consumer debt.

If you look closely at her schedules you will notice something important. Her form B22A which is typically filled out to prove to the Bankruptcy Court that you pass the means test and belong in Chapter 7 Bankruptcy...is mostly blank.

It is blank except for two small squares that are blacked out. The important square for this discussion is the square that "declares" that Ms. Warwick's debts are primarily "non-consumer" debt.

She darkened this square because her tax debt... far exceeds her non-consumer debt. She knows that as a result, the means test doesn't apply to her and she gets to file a chapter 7 bankruptcy.

She gets to file for bankruptcy even though she spends $2000.00 per month on utilities and has a driver, a housekeeper and a personal assistant.

The same is true for you in Arizona. No, you don't get to hire a personal assistant...but you do get to qualify for a chapter 7 bankruptcy If you have tax debt that is the largest portion of all your debt.

At least until the law changes.

MESA ARIZONA BANKRUPTCY - THE MOST COMMON MISCONCEPTIONS

Tue, 26 Mar 2013 11:10:36 -0700

There are lots of misconceptions about bankruptcy. I hear quite a few and I have tried to make a list of the most common.

Misconception Number 1 - TAXES CAN'T BE DISCHARGED IN BANKRUPTCY

Income Tax

Tax on Income can be wiped away in bankruptcy as long as it meets some basic criteria. It is the most common type of tax debt that is dealt with in bankruptcy. I have helped clients discharge millions of dollars in income tax debt.

Other tax debts can be dealt with in bankruptcy as well.

The non-trust fund portion of the payroll tax.

Small businesses have to withhold an employees' income tax, social security and medicare tax and than they have to match a certain portion of that payroll tax and send it all in. (6.2% social security tax and 1.45% medicare tax) If the entire amount isn't sent in, the small business owner in a sole proprietorship or single member LLC will owe the entire amount personally.

The portion that is withheld from the employee's check is called a "trust fund tax" and isn't ever dischargeable in bankruptcy.

The employer portion can be discharged in bankruptcy assuming no "tolling" events have occurred when:

More than 3 years from the date the employment tax return was due and the date the bankruptcy is filed have elapsed

More than two years have gone by between the date the returns were actually filed and the date of the bankruptcy filing and;

No "willful evasion" or purposeful attempt to avoid the obligation to pay took place.

Arizona Transaction Privilege Tax

The Arizona Transaction Privilege Tax is a sales tax but it isn't collected from the customer. It is tax on the privilege of doing business paid based on a percentage of sales. It is not "trust fund". If it meets criteria similar to the criteria mentioned above under Non Trust Portion of Payroll Tax, it may also be discharged in Bankruptcy.

Tax Penalty

The IRS issues various penalties related to income tax debt. The big ones are the "failure to file a tax return on time" penalty and "failure to pay" the debt penalty.

These penalties add up fast and with interest will often double the debt.

In a chapter 7 bankruptcy these penalties are dischargeable if they meet the three basic date rules...the same rules that are required for the discharge of the underlying income tax debt.

3 years between due date of return and filing date of bankruptcy
2 years between actual filing date and filing date of bankruptcy
240 days between assessment date and bankruptcy filing date

What if the underlying debt hasn't met meet one of these rules. In a chapter 7 case, the debt and the penalty survive the bankruptcy.

In a chapter 13 bankruptcy however, the penalty and the interest on the penalty is treated as non priority dischargeable debt no matter it's age.

The chapter 13 bankruptcy is an important tool in dealing with debt as a result. Especially for those people who have income tax debt with lots of penalty and none of it has met the date requirements for discharge, but there are other creditors forcing the person into bankruptcy.

Misconception Number 2 - YOU WILL LOSE YOUR HOME

In Arizona, $150,000.00 equity in a personal residence is safe from creditors. This same rule applies in a bankruptcy case.

The simple example:

You live in a home valued at $300,000.00, and the mortgage is $200,000.00.
Equity is $100,000.00 and the equity is safe.

But what if you aren't making your mortgage payment? The Bank that owns the mortgage will foreclose on the home but not the Bankruptcy Court.

Misconception Number 3 - YOU GET TO CHOOSE WHICH CREDITORS TO "INCLUDE"

A common misunderstanding and a potentially dangerous one. All info has to be disclosed to the Bankruptcy Court. Your assets, debts, income and budget. Failure to disclose can be considered a crime.

The Bankruptcy Code determines how a creditor is treated whether it is disclosed or not and that treatment depends on a number of things like when the money was borrowed, type of debt, secured vs unsecured, priority vs. non-priority.

When you file bankruptcy make sure and tell the attorney every debt you have.

Misconception Number 4 - YOU CAN LOSE YOUR JOB IF YOU FILE FOR BANKRUPTCY

The employer is barred from firing because you filed for bankruptcy. The employer can decide not to hire based on a bankruptcy filing though.

Misconception Number 5. YOU HAVE TO BE "DESTITUTE" TO FILE FOR BANKRUPTCY

The bankruptcy code doesn't contain a "really broke" provision. Many people file that have an income and who are able to pay their basic bills. Some are even able to file who make a better than decent income. Many assets are protected as well up to certain values like:

Home - Equity to 150,000.00
Tax Qualified Retirement Accounts and pensions
Certain Whole Life Insurance Policy Cash Value Amounts
1 Car per person up to $5000.00 in equity
Most household Furniture
Clothing, Wedding Rings, Gun
Six Months of Food Fuel and Provisions

Misconception Number 6 - EMPLOYER IS NOTIFIED OF THE BANKRUPTCY FILING

The employer doesn't receive a notice of the bankruptcy unless you owe him or her some money. However, filings are in the public record.

Misconception Number 7 - MY CREDIT WILL BE BAD FOR TEN YEARS

Most bankruptcy filers see some improvement after a relatively short period of time 1 to 2 years, especially if they apply some effort after the case is over to rebuild the credit score.
Bankruptcy often improves the credit score of many with already bad credit.

Misconception Number 8 - I CAN GIVE MY STUFF AWAY AND PROTECT IT FROM BEING TAKEN IN THE BANKRUPTCY CASE

If you give away an asset to anyone within a few years of filing the bankruptcy case you have to disclose it to the Court when you file and the trustee can sue the transferee for a return of the asset or it's value. You must sell the asset for market value.

Don't move assets around until you have spoken with an experienced attorney.

Misconception Number 9 - I HAVE TO FILE BANKRUPTCY JOINTLY

You may be able to file alone and in Arizona still give your spouse the benefit of the bankruptcy discharge i.e. protection from creditors. It is called the "community discharge". Speak with an experienced attorney about this.

BANKRUPTCY AND THE IRS COLLECTION DUE PROCESS APPEAL - UNDERSTANDING HOW PATHS CROSS MAY MAKE A DIFFERENCE IN YOUR BANKRUPTCY CASE

Mon, 25 Mar 2013 12:03:35 -0700

The Bankruptcy Code and the Tax Code cross paths on a regular basis. One example of this is when a taxpayer has filed a "Collection Due Process" Appeal with the IRS and used it to eventually negotiate a payment plan.

While the Collection Due Process appeal has it's advantages...it stops IRS collections, buys time, and allows you to discuss your legal proposal with an IRS appeals officer rather than a revenue officer or IRS automated collections... it has a downside when it comes to filing bankruptcy.

When the appeal is filed, the clock that determines when tax debt can be discharged in bankruptcy is "tolled" or stopped.

A few based tax discharge rules:

1. The bankruptcy must be filed at least 3 years after the tax return was due to be filed including extensions.

2. The bankruptcy must be filed at least 240 days after the IRS places the amount you owe in it's records. (known as the "assessment" date)

These time periods are tolled while the collection due process appeal is in place plus an extra 90 days. You can see the bankruptcy code section at 507(a)(8)(G).

An example of how this works:

If your 2009 tax return was filed on May 28th of 2010, and assessed on May 28th of 2010 and no extension to file was used:

The 3 year rule would require that the bankruptcy be filed on or after April 15th 2013, 3 years+ from the date the return was due to be filed, (not the date actually filed has to do with a separate rule - the two year rule not discussed here)

The 240 day rule would have easily been met by the time the 3 year rule was met.

The tax debt would meet the date requirements for bankruptcy discharge on the latest required date or the 3 year date requirement here.

However...if you filed a collection due process appeal at any time between your assessment date and the 3 year date above...both the 3 year date and the 240 day date would be tolled by whatever time period you were in the appeal process plus ninety days.

If the appeal process were 6 months long or 180 days, than the 3 year rule wouldn't be met until 270 days + days after the original 3 year rule was met or April 15th, 2013 + 270 days.

Conclusion

You may be surprised at how often the time spent in an appeal isn't reviewed prior to filing a bankruptcy case. Many bankruptcy filers think that their tax debt is going to be removed and find out after the bankruptcy case is over that a step in the analysis was missed.

If you have a large tax debt...and are considering bankruptcy, be certain that the history of your account with the IRS is closely reviewed and that all the events that toll the time periods are taken into account. It may be necessary to stay in the IRS payment plan for a longer period than you had hoped in order to make the bankruptcy code work for you.

Sidenote

Only timely filed collection due process appeal requests toll the 3 year and the 240 day rules. Timely filing is 30 days from the date the IRS mails the Final Notice of Intent to Levy.

Late filed collection due process appeal requests shouldn't toll these periods. Sometimes it makes sense to file the collection due process appeal late. Read more about this here.

CREDIT CARDS AND 1099 FORMS - WHEN THE CREDITOR FORGIVES THE DEBT... HOW DO YOU AVOID OWING IRS DEBT ON THE FORGIVEN AMOUNT

Fri, 22 Mar 2013 18:01:51 -0700

Many of our Clients receive or are expecting to receive
a 1099 form in the mailbox from Creditors that have or will be forgiving credit card debt.

The Creditor may have forgiven the debt as part of a settlement or just forgave it because it made sense.

The 1099 form the creditor issues to you isn't a good thing. It tells the IRS that the credit card debt was forgiven and that the forgiven portion is now taxable income. If you fail to list it on your tax return as income the IRS will change your return and add it. It will then send you a bill.

If you have negotiated a settlement with a credit card lender, or one just forgave a debt without your input...you should be concerned about the potential tax liability.

Here are 3 ways to avoid the liability:

1. Bankruptcy

If the debt obligation was discharged in a bankruptcy case, it can't be counted as taxable income. My Arizona clients often weigh out whether it makes more sense to try and settle credit card debt or whether it makes more sense to file for bankruptcy.

In making that decision, the ability to treat the debt as non-taxable as a result of the bankruptcy filing has to be taken into account.

If you are sent a 1099 for a debt that was discharged in bankruptcy and the 1099 was issued after the filing of the bankruptcy, talk to your accountant about a form 982 to use with your tax return. This form tells the IRS that the discharged debt isn't taxable.

2. Insolvency

If you were "insolvent" just before the debt was forgiven, the debt is tax free to the extent of the insolvency. If the debt was greater than your assets by $50,000.00 at the moment before the forgiveness occurred, you would be able to have $50,000.00 of the debt forgiven and avoid tax on it.

The form 982 is key here again. If you don't file it with the return, the IRS will treat the debt as income.

3. Principle Only

Only the forgiveness of the principal portion of the debt is taxable.... not the interest.

WORRIED ABOUT IRS LEVY ACTIVITY? FOUR STEPS YOU SHOULD ALWAYS TAKE

Fri, 15 Mar 2013 16:58:21 -0700

Stephen J. Dunn at Forbes has written a short article that caught my eye about "Dealing with IRS Collection Action". My blog is full of information about how to deal with a tax debt and what the options are, but this article reminded me that people with tax problems like to see the big picture.

His article provides some "big picture" and makes the following suggestions that I agree with:

1. Open Mail From the IRS

Mr. Dunn makes the point that correspondence from the IRS has a purpose. Failing to open is usually the first step toward a bad outcome. I see a common problem caused by my clients who have failed to open a letter from the IRS called a "Final Notice of Intent to Levy" before they meet me the first time.

If they had opened the letter, they would have seen that they could have appealed the IRS decision to levy a paycheck and appealed that decision, buying them more time to get their finances in order and propose an alternate to enforced collection.

Another letter left unopened is the IRS letter indicating an Audit or the completion of a substitute tax return. Failure to open those letters and respond often end up in the creation of thousands of dollars of incorrectly assessed debt.

No matter how scary the letter looks, open it. Share it with an experienced tax resolution attorney who will be able to advise you and then commit to do something about it.
Otherwise it usually gets worse.

2. Convince the IRS to Hold Collection Activity

The IRS doesn't have to stop collection activity just because you ask it to. Read more about when it have to stop collection activity here - "IRS Levy - 13 Common Situations When the IRS Can't or Won't Levy your Assets or Garnish your Paycheck".

If it hasn't started to levy an account or garnish a paycheck, the IRS collection personnel will often agree to hold collections activity for a few weeks to give your attorney time to: review your finances, the history of the account, which returns need to be filed, statute of limitations periods, and bankruptcy dates and to determine which legal option may be the best to propose.

If this step isn't taken i.e. if at least some time isn't obtained to determine the issues above, you will face a difficult situation: Levy activity and no time to figure out how best to deal with it.

3. Investigate - Analysis can be everything

We need to know a number of facts in order to determine the legal option or options that make sense. In order to do this we look at IRS account transcripts to help determine:

Statute of Limitations on Collection
Bankruptcy Discharge Dates
Which returns need to be completed
Which ones need to be challenged
Incorrect Income Reporting by 3rd parties
Incorrect Debt Calculation by the IRS
Whether penalties have been correctly assessed

We also look at our client's income budget and asset history to help calculate whether an offer in compromise may make sense and what changes can be made to help it work.

We find that many people skip the analysis step and don't apply the law to their set of facts. They end up in a payment plan that doesn't work or filing an offer in compromise that isn't going to happen.

4. Propose a Solution to the IRS that will work

The solution may be one or more of the following:

Offering to settle for less than what is owed - IRS Offer in Compromise
Negotiating a payment plan based on actual income and expenses
Negotiating a streamlined plan
Creating tax returns that are missing
Creating tax returns and using them to challenge the IRS debt incorrectly created by its tax return
Bankruptcy
Penalty Abatement
Innocent Spouse Negotiation

Until you know the history of the case, the income, budget and asset situation you have both in the past but also what it may be in the future, and the law, you won't necessarily know what the best option or group of options will make sense.

photo credit: wordofgodmission.com

IRS LEVY - SHOULD YOU FILE A COLLECTION DUE PROCESS APPEAL ON TIME? TWO REASONS TO BE LATE

Fri, 08 Mar 2013 20:19:19 -0700

The IRS is a debt collection machine. If there were an NFL Draft for debt collection outfits, the IRS would be the first player drafted every year.

Part of the reason why the IRS is so good at its job is because it has it's hands "untied". Unlike normal creditors the IRS doesn't have to file a lawsuit and obtain a Judgment to begin the collection process. It just has to "assess" or place the debt into its books as an amount owed and issue some notices to the taxpayer by mail.

There are just a few ways to slow it down. One of the most important is the ability of the taxpayer to file a Collection Due Process Appeal.

If the IRS levy machine is the equivalent of Hall of Fame Running Back Jim Brown, the Collection Due Process Appeal is the equivalent of Dick Butkus.

The Collection Due Process Appeal, properly and timely filed, will stop the IRS collection activity cold, until a referee steps in to determine whether there is a better alternative than levy or garnishment. That referee is initially an Appeals Officer with the IRS, but it can be the US Tax Court. This type of Appeal levels the playing field.

So if the Collection Due Process Appeal is so great...why in the world would I tell you that there may be two occasions when you should file it late i.e. not on time.

Wouldn't that be like sending Butkus in after the ball is hiked?

Let me explain:

Filing the Collection Due Process Appeal late is called an "Equivalent Hearing" request. "Equivalent" to a Collection Due Process Hearing.... get it?

It isn't really equivalent though because when you file the appeal late, you will lose a few rights:

1. The right to have your case heard by the appeals officer

The IRS doesn't have to stop the levy activity and give you a chance to be heard by the appeals officer. These equivalent hearings are granted on a case-by-case basis and aren't absolute.

However, the Internal Revenue Manual guides tells the IRS to process the late appeal and give the taxpayer a hearing while placing a hold on collections. In most cases the IRS does this...even if the request if filed a year late (1 year is the deadline to file the late request)

2. You lose your ticket to US Tax Court

You will not be able to ask the Tax Court to rule on the reasonableness of the IRS collection activity. Most people don't anyway.

So again...why not just file the appeal on time?

Two reasons:

1. When you don't want to stop the Statute of Limitations clock from ticking

As you probably know, the IRS has 10 years to collect the debt. The timely filed Collection Due Process Appeal stops this clock form running. If you are close to the 10 year period, and in your situation it would make sense overall, the equivalent hearing request will typically allow you to get your hearing and the benefit of a shorter collection clock.

2. When you don't want to stop the clock from running on the discharge of tax debt in bankruptcy

The Collection Due Process Appeal will stop 2 of the 3 time periods that must be met in order to treat income tax as dischargeable in a bankruptcy case.

a. The 3 year rule - the bankruptcy must be filed more than 3 years after the return was due to be filed

b. The 240 day rule - the bankruptcy must be filed more than 240 days after the debt is assessed or placed in the books by the IRS

Equivalent hearing requests don't stop either clock. If you are otherwise a good candidate for bankruptcy, and the timeframes to get you there are what is holding you back, you will not want to stop those time frames from running by requesting the wrong type of hearing.

image credit - si

BANKRUPTCY TRUMPS THE IRS COLLECTION MACHINE - IT WILL STOP THE IRS LEVY

Fri, 01 Mar 2013 19:35:58 -0700

The IRS likes to garnish paychecks and levy bank accounts and other property. This is the primary way that it pushes people into payment plans that haven't already negotiated one or filed an offer in compromise. There are several ways to stop a levy or other collection action by the IRS (read this) but often the best way to stop it is to file a bankruptcy case.

A bankruptcy filing creates an automatic stay. This means that the moment the bankruptcy is filed; creditors...including the IRS have to stop collection efforts. If a paycheck is being garnished, it has to stop. The Bankruptcy Code trumps the tax code and removes any IRS discretion in this area of the law. Specifically, Section 362(a) of the Bankruptcy code requires that the stay occur.

Stopping IRS collection activity is just the beginning though of what the bankruptcy may do.

The taxpayer may be able to:

1. Stop future IRS lien filings
2. Discharge the obligation to pay tax debt
3. Stop the IRS from adding additional interest and penalty to the debt (Chapter 13 Bankruptcy)
4. Create a payment plan on the non-dischargeable debt tax debt that may be far less than an IRS Installment Agreement would be (Chapter 13 Bankruptcy)
5. Reduce or eliminate other debt, like credit card debt, debt related to repossession, personal loans etc.

If you are having a problem negotiating an offer in compromise with the IRS, or if your IRS plan payment is too high, or if you have tax debt and other debt problems, bankruptcy may be the answer...not just to stop IRS collection activity but also to find a fresh start.

ARE YOU CONTEMPLATING BANKRUPTCY AND FILED A BANKRUPTCY PREVIOUSLY? WHEN CAN YOU FILE AGAIN?

Fri, 22 Feb 2013 23:27:49 -0700

If you filed a bankruptcy case before and are worried that you may need to use bankruptcy again, you are probably concerned about whether you can file a bankruptcy case again and discharge the debt.

The primary stumbling block for those who have previously filed, is whether or not they are barred from filing again and receiving a discharge of the debt because they filed a bankruptcy and received a discharge in the past.

There are other rules that pertain to your ability to file that have nothing to do with dates and I suggest that you speak to an experienced bankruptcy lawyer about those rules and those that follow here...but,

Here are the basic date rules:

If you want to file a chapter 7 bankruptcy now:

a. You can't have filed a chapter 7 bankruptcy within the last 8 years and received a discharge.

b. You can't have filed a chapter 13 bankruptcy within the last 6 years and received a discharge.

If you want to file a chapter 13 bankruptcy now:

a. You can't have filed a chapter 7 case within the last 4 years and received a discharge.

b. You can't have filed a chapter 13 case within the last 2 years and received a discharge.

If you file a case before these time frames have run, you may be able to file again, but you won't receive a discharge of debt. The key to understanding whether you will be eligible will be whether you actually received a discharge in the previous case. If the case was dismissed prior to the entrance of a discharge order, than the list above shouldn't apply to you.

The "Discharge" is a permanent Order of the Bankruptcy Court that prohibits certain creditors from taking any collection action including communication.

Determining whether and when you should file for bankruptcy can be a complex undertaking. Nuances like the one above add to the complexity. Make sure and have a qualified bankruptcy attorney fully analyze your situation before deciding to file...again.

IF YOU FILED YOUR INCOME TAX RETURN ONE DAY LATE WILL IT FOREVER BE BARRED FROM DISCHARGE IN BANKRUPTCY? SOME COURTS ARE SAYING YES.

Fri, 08 Feb 2013 22:42:14 -0700

I repeat myself on an almost daily basis when I tell people that income tax debt and certain other tax related debt is dischargeable (the obligation to pay it can be eliminated) in bankruptcy if certain requirements are met. The requirements in their most basic form are:

a. The tax return that forms the basis for the debt must have been due for filing more than 3 years before the bankruptcy is filed.

b. The tax debt can't have been assessed (determined to be a debt formally) within 240 days of the bankruptcy filing date.

c. The taxpayer cannot have committed fraud or "willful" evasion in relation to the debt.

d. The taxpayer must have filed the tax return more than 2 years before the bankruptcy case is filed.

There are two issues I often confront in relation to the above rules.

The first issue is what my client has done to stop the clock from running on the above time frames. Prior bankruptcy filings, prior offers in compromise and certain types of appeals may serve to extend some or all of the dates and make the bankruptcy filing more difficult.

The second issue has to do with the 4th item above, and that is whether the taxpayer filed the tax return at least two years prior to the bankruptcy filing and whether the taxpayer filed the tax return before the IRS or state taxing agency assessed a debt based on a return it created.

A new issue is slowly spreading across the US in relation to the 2-year rule however.

Specifically, some courts are using a decision out of the US Court of Appeals for the Fifth Circuit, McCoy v. Mississippi State Tax C.pdf, 666 F.3d 924 (5th Cir, 2012) to interpret the bankruptcy code in a way that will be very detrimental to delinquent tax return filers.

Several Courts have now interpreted a provision in the bankruptcy code to mean that if a tax return was filed late, by even one day...the 2-year rule doesn't matter, and the debt can never be discharged.

The reasoning these courts are using has missed a step and the IRS' own litigation position on the issue CC 2010 016 (1).pdf differs from these opinions. Nonetheless, this line of reasoning is spreading.

Right now the IRS is not challenging the discharge of debt related to late-filed income tax returns in Arizona bankruptcy cases. However, there is no Arizona case that speaks to this issue directly and the Ninth Circuit Court of Appeals hasn't faced the issue either.

It is possible as a result, that a late-filed return may never be considered dischargeable in a bankruptcy case at some point in the future.

My advice to those who think they may have a large tax debt remains the same. Have the return created, take it to an experienced tax resolution attorney and consider filing it before the IRS creates a return for you.

An obvious addendum to the advice - file your returns on time.

THREE CHANGES MADE TO IRS OFFER IN COMPROMISE PROGRAM MEAN BETTER OPPORTUNITY TO SETTLE TAX DEBT

Fri, 25 Jan 2013 21:53:20 -0700

As you already know, in May 2012, the IRS published new guidelines regarding its for its offer in compromise (OIC) program. It did this in relation to it's "Fresh Start" program. The purpose of the changes was to help taxpayers who are having a difficult time as a result of the poor economy, rid themselves of more debt and get their financial lives in order.

Whether the IRS stays true to it's intent, is yet to be seen... but I thought it wise to provide a short review of three of the most important changes that were made to the program. All of these changes were focused on how the financial analysis is done to determine eligibility.

1. Allowing the taxpayer to include student loan payments and partial state installment payments, and minimum credit card payments in the allowable budget calculation.

When the IRS is negotiating a Taxpayer's ability to pay a tax debt, it reduces the ability to pay by a set of "allowable" living expenses. These are called "Allowable" because the IRS creates the living expense guidelines in an effort to promote uniformity.

However, these "standards" have created a mess. They usually cause an overstatement of the Taxpayer's ability to pay the debt and make it difficult for the Taxpayer to comply with the negotiated payment amount and maintain a basic living standard at the same time.
The IRS had finally admitted to the problem by expanding how it defines "allowable" living expenses.

One way is to allow for the monthly payments toward local delinquent state tax. It has limited this amount though by permitting only a certain portion of the tax payment to be included in the calculation of the Taxpayer's reasonable collection potential.

Example: Taxpayer owes delinquent income taxes (including penalties and interest) of $50,000 to the IRS and $10,000 to the State of Arizona. Of the combined total liabilities ($60,000), 84% is owed to the IRS (50,000 ÷ 60,000), and 16% (10,000 ÷ 60,000) is owed to the state. If you make the additional assumption that after calculating the Taxpayer's reasonable collection potential without the state tax liability, the IRS decides that the Taxpayer has has $200 per month in disposable income. The IRS would allow monthly payments of $32.00 to the state (16% of $200) with the remainder ($168.00) going toward to the Settlement Amount with the IRS.

Student loan payments that are guaranteed by the Federal Government for after high school education and that are actually being regularly made are included fully in the allowable expense calculation.

Further, minimum credit card payments, bank fees and charges are also included when calculating the miscellaneous allowance amount.

2. Changing the way that dissipated assets are used to calculate future income.

A "dissipated" asset is an asset that has been sold, transferred, used as collateral for a loan, or otherwise disposed of and isn't available anymore to pay down the tax debt.
The IRS gets to include the value of the dissipated asset in in calculating the reasonable collection potential of the Taxpayer if the asset became "dissipated" within six months prior to or after the tax assessment in an attempt to avoid the payment of the tax or was used for purposes other that to pay items necessary for the production of income or income or the health and welfare of the Taxpayer and his or her family.

The IRS has been able to use a three-year look-back period from the date the OIC was submitted to calculate the value of the Dissipated Asset and to determine whether it should be included in calculating the reasonable collection potential.

Example: The taxpayer cashes out a 401k account to pay for a vacation to Cancun. The value of that cash out would be included in the Taxpayer's reasonable collection potential.

Now...equity in assets that produce income won't generally be included in calculating reasonable collection potential. In order for the equity to be excluded, the asset has to be critical to the operation of a viable and ongoing business. The income from the business will continue to be included in the reasonable collection potential calculation.

Example: Acme Company has 2 machines that produce tennis rackets. One machine has no equity and is encumbered and one has $50,000.00 in equity and isn't encumbered. They both produce $20,000.00 in net revenue per year. The incomes from both of the machines are going to be included in the reasonable collection potential calculation but the value of the second machine won't be included. If the vehicles weren't necessary however to the success of the business, the IRS may be able to include the equity.

3. Changing the way that basic future income is calculated.

Under the old guidelines, the IRS would assume at least four years of future income when calculating reasonable collection potential if the settlement amount was going to be paid within 5 months. It would consider five years if the settlement amount was going to paid over a longer period.

The four-year look forward period has been reduced to 12 months and the five-year look forward period to 24 months.

Example: Taxpayer has monthly income of $6,000, allowable expenses (also expanded) of $5,700, and no assets with any real value. If all other OIC qualifications are met and the OIC was completely paid within five months of acceptance, the Taxpayer would have had to pay $14,400 ($300 × 48) under the old system. The required payment amount using the new calculations would be only $3,600 ($300 × 12).

Will OIC Acceptance Rates Improve as a Result of the Above?

We think that approval rates will increase over the long term. The IRS is indicating higher acceptance rates overall already. For many taxpayers however, we have continued concerns and caution our clients to make sure that they undergo a rigorous analysis with a qualified attorney before embarking on an offer in compromise. If the offer in compromise fails, the taxpayer will have wasted potentially thousands of dollars in fees and other expenses and will have stopped the IRS statute of limitations clock from running.

IRS Offer in Compromise - Extensive preparation is key to success

Fri, 18 Jan 2013 13:38:51 -0700

"Before anything else, preparation is the key to success"
Alexander Graham Bell (1877-1922)

I never met Mr. Bell. He passed away just a few years before my time. However, when I read about his life I come away convinced that he had his share of ups and downs and that those experiences helped him realize the importance of detailed preparation.

We have learned the same thing over the years. As a general rule, our clients are most successful when they are prepared to work with us in the detailed preparation of a case.

Doing it right the first time is not an easy task.

The IRS Offer in Compromise in particular requires a large amount of preparation.
Much more preparation is required than most of our clients realize when they initially contact us. The following is a list of the steps we take from beginning to end in an effort to make sure the case goes well.

Phone Call

Preparation begins with a phone call. Potential clients call and speak to me for 15 to 20 minutes for free and I ask them a number of questions about their finances. I do this to determine whether an offer in compromise may make sense i.e. to find out if there is anything that would preclude a person from even considering the Offer in Compromise as a way to substantially reduce or eliminate tax debt.

In Person Meeting

If we think we can help based on the information gathered during the phone discussion, we meet in person. The potential client brings a number of items to that meeting including some pay history, tax history, budget, asset list, debt list and a good memory if they have one.

Additional questions are asked, goals are discussed, and some numbers are crunched.

This process will usually give us enough information that we can either solidify or change our original opinion about whether the Offer in Compromise will make sense or whether another avenue should be explored.

Formal Analysis

After the initial meeting, our clients will provide a stack of documents that may include profit/loss statements, tax return information, several months of paystubs, several months of proof of payment related to housing related costs, medical expenses insurance bills, secured debt payments, unsecured debt, other tax debt and related payments, bank accounts statements for several months, information related to assets and transfers of assets and other items.

While the client is providing the above we usually order and review IRS documents in order to find out when the IRS statute of limitations will run on the debts in question, whether they will be dischargeable in bankruptcy and when, whether they have been correctly calculated, whether there are missing returns, income information for years any returns are missing, penalty information in order to help determine whether penalty abatement might be an option etc.

Second Meeting

When all of the above information has been collected and reviewed we typically meet with our client again and discuss whether the offer in compromise will make sense based on the situation as it stands or whether some changes may need to be made to budget or assets in order to better qualify. If a bankruptcy makes more sense we discuss this and why. If an IRS payment plan negotiation makes more sense, this is also discussed in detail.

Planning

If time permits, many clients undergo a period of "planning" in order to ensure that the case has the best chance of success. This planning period may involve the negotiation of an IRS payment plan to help avoid IRS collection activity. It often includes waiting for certain tax debts to become dischargeable in bankruptcy which may effect the Offer in Compromise, waiting for the filing of tax returns and for a specific amount of time to run out after assessment of the debt, making changes to budget, making changes to tax withholdings and asset items, making sure returns are filed and all estimated payments have been and are being made in order to make the offer in compromise work. These different planning options sometimes hold up the filing of the Offer for several months....on purpose.

Preparation of Final Documents

The documents provided to the IRS to qualify for an Offer in Compromise are typically thick. Proof of assets, values, income and most budget items must be provided and they must match the financial statement AND it all needs to make sense and be recent.

This process alone is time consuming and difficult for a client especially. Receipts and cancelled checks need to be kept and gathered and changes need to be minimized without first making a joint decision to make the change.

Filing Case

When the Offer packet is filed, it must include an offer in compromise request or form 656. It must also include a filing fee and the first payment if the client is paying the offer amount in installments OR a percentage of the offer amount if the client is proposing a cash offer. The IRS will review the "packet" and determine if it is "processable". If not, it will typically ask for additional documents.

Review of Offer by Offer Examiner

When the Offer Examiner is reviewing the financial documents and if every item claimed isn't backed up with enough proof and within the IRS guidelines, the Examiner will disagree with those aspects of the offer and counter OR reject outright.

The key is a completely planned and fully prepared offer packet that doesn't allow the Offer Examiner to speculate, wonder or question.

Appeal

The goal of thorough preparation is to avoid the necessity of appealing some aspect of the Offer Examiner's response.

Conclusion

The best outcome is the acceptance of the Offer by the Examiner. This will only be achieved if a lot of preparation has taken place. There is no substitute.

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Instant Tax Service Franchisee barred from creating tax returns....forever

Fri, 11 Jan 2013 22:37:18 -0700

A federal court in Nevada has barred the owner of several Instant Tax Service Franchises from preparing tax returns. Benyam Tewolde and his wife signed an injunction order without admitting guilt which was signed by the US District Court Judge Miranda M. Du.

Apparantly Mr. Benyam and his staff were helping clients fabricate business and income information, falsely claiming filing status, and education credits, selling bogus loan products, and filing returns without customer consent. They also allegedly filed fraudulent personal returns on their own income.

The injunction bars Mr. Tewolde and his wife from preparing or filing federal tax returns for other people, training tax preparers or owning/managing a tax preparation business...forever.

The Feds are also after the Franchisor Instant Tax Service and it's owner, Fesum Ogbazion in Dayton, Ohio.

The Justice Department's Tax Division has obtained hundreds of injunctions in the last decade against tax preparers that defraud taxpayers and those who file fraudulent returns.

Information about these types of cases is available on the Justice Department's website .

If you are going to hire someone to help you create a current year tax return, we always advise that you use a reputable CPA, especially if you are in business or have rental properties. You can contact us and request our CPA referral list.

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Mortgage Forgiveness Debt Relief Act - You can take a breath now...It has been extended

Wed, 09 Jan 2013 15:33:33 -0700

The "Fiscal Cliff" Bill passed by the House and Senate this week, re-authorized the "Mortgage Forgiveness Debt Relief Act". This should delight all those facing a home foreclosure in the coming year.

Background

When a Homeowner owes the Bank more than the home is worth, and the home is foreclosed on, the Bank will typically issue a 1099 form. This form tells the IRS the amount of mortgage debt that was forgiven; or in other words, the amount that the Bank was still owed after the sale of the home took place.

The forgiven or cancelled debt is treated as income. The Homeowner has to pay tax on income that he or she never actually saw.

The Homeowner has to pay tax on the forgiven debt unless:

1. The Homeowner filed for bankruptcy and discharged the obligation on the loan.
2. The Homeowner meets the requirements to qualify for "insolvency"
3. The Homeowner meets the requirements to qualify for exclusion of the income from tax per the Mortgage Forgiveness Debt Relief Act, which was scheduled to Sunset on December 31, 2012.

Caution

The Act does not protect Homeowners from the debt associated with every type of mortgage debt. Be especially wary and speak with an attorney if you have refinanced, the mortgage is related to a second home, the mortgage is related to a rental property or commercial property, or you have a second mortgage.

If the home doesn't qualify, and it is foreclosed on BEFORE a bankruptcy is filed, the homeowner may not be able to use the later filing of the bankruptcy case to avoid the tax consequence. He or she will have to rely on the "Insolvency Exception" or the Act.

Foreclosure of the home is considered a "sale" for the purpose of determining whether there should be a capital gains tax paid. The homeowner may still have a capital gain despite avoiding income tax as result of one of the three exceptions above.

We Can Help

We help clients who are facing the following questions in relation to foreclosure:

1. Clients who may need a bankruptcy and are also facing foreclosure

If you have other debts that are causing you to consider bankruptcy and are living in a home, or own a property that will not qualify for positive treatment under the act or you will not qualify to meet the insolvency requirements to avoid the taxation on the forgiven debt...it may be wise to file the bankruptcy sooner than later in order to avoid the potential tax problem.

2. Clients who have had the IRS create substitute returns that include the forgiven debt as income as a result of the foreclosure

We have helped many clients who have unfiled IRS Returns and who have had the IRS create those returns with incorrect information. The incorrect information often includes the inclusion of the forgiven debt from the foreclosure as income even though the client filed for bankruptcy, met the insolvency requirements or met the requirements of the Mortgage Forgiveness Debt Relief Act.

3. Clients who have tax debt as a result of the foreclosure

Sometimes a person has had debt forgiven which has caused a large tax debt and there was or is no ability to use one of the 3 exceptions listed above. The tax debt is therefore accurate. For those clients, we can help develop plan to reduce or eliminate the debt depending on the overall financial situation.

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