Pretty Country Outside of Tucson, Arizona

I have had a number of people that have gotten behind on filing their taxes or paying their taxes, and they wait, and wait, until… eventually the I.R.S. seizes their paycheck. The I.R.S. calls it a “wage levy.”

And when it happens, you know it. Your payroll office calls you, or you get the notice in the mail. If you fill out the form to claim the “exempt” or safe amount, it’s not very much that you get to keep!

As a practical matter, the I.R.S. doesn’t expect you to live on what they leave you. They file a wage levy to “get your attention” because you have not been taking care of your tax obligations. What do you do next?

Well, that depends. If you don’t owe too much, and you’re otherwise in pretty good financial shape, you can file any delinquent tax returns, and get on a payment plan.

The IRS calls it being “in compliance.” They will not make a payment plan or Installment Agreement with you, until you are in compliance, that is, you have filed all of your delinquent tax returns. Only then will they consider releasing the levy.

Another option in dealing with the IRS wage levy, is to file Chapter 13 bankruptcy. Immediately upon filing, an “automatic stay” or federal court order prevents the IRS from levying your pay. They have to fax a Release of Levy to your payroll office right away.

Of course you will still need to prepare and file all delinquent tax returns. But the delinquent taxes can be paid out over a long period of time, up to 60 months. And in many cases, interest stops.

Depending upon how old your taxes are, and whether or not you had filed your tax returns, some or all of the taxes can even be discharged or cancelled. For that matter, in the right case, you may want to file a Chapter 7 bankruptcy and just cancel or discharge the taxes, but the situation must be right.

If you are considering filing a bankruptcy to deal with your IRS or other tax debts, this is not a “do it yourself” project. You should hire someone like myself, that does this for a living and understands all the rules.

If you live in the Houston, Texas metro area, call my office at 713-772-8037 and make an appointment, or you can go to my main website at www.jthomasblack.com and make an appointment by clicking the red button on the upper right-hand side of any page.

If you are not in Houston or surrounding counties, look for a referral through the National Association of Consumer Bankruptcy Attorneys (NACBA) at www.nacba.org.

After going through the other options with them, bankruptcy became a likely alternative (they owed a lot of other debt also). But because the tax returns for the three recent tax years were not filed, they will likely decide to wait to file Chapter 7 bankruptcy.

For IRS income taxes to be discharged or cancelled in bankruptcy, the tax returns must be filed more than two years before the filing of the bankruptcy case, among other requirements.

Other requirements: The taxes must also be three years old, measured from the “due date” of the tax returns. And the taxes cannot have been “assessed” or determined to be due by the IRS, within the 240 days (about 8 months) prior to the filing of the bankruptcy.

In the Bankruptcy Code that existed prior to Oct. 17, 2005, there was what I call the “bad-boy” provision in Chapter 13 of the Bankruptcy Code, where a person who had not filed their tax return could file a Chapter 13 bankruptcy, and discharge taxes even if they had not filed a tax return, so long as the taxes were more than 3 years old.

But that was done away with by BAPCPA, the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.” Now, the rules are the same in Chapter 7 and Chapter 13, and require that a taxpayer has filed their returns at least 2 years before filing the bankruptcy, in order to have the taxes discharged.

What to do in the meantime? Ask for an Installment Agreement, where you make payments on the tax. Or, if you qualify, you may be eligible for “uncollectible status,” where the I.R.S. basically puts your file on a shelf temporarily. In either case, the time limits continue to run, and you can file the bankruptcy after they have passed.

If you live in the Houston Texas area or surrounding counties, give my office a call at 713-772-8037 to make an appointment. Or, you can visit my main web site at www.jthomasblack.com and make an appointment with me online by clicking the red button on the upper right-hand side of any page.

My Office Building at 2600 So. Gessner, Houston Texas

Most people don’t think I.R.S. income taxes can be cancelled or “discharged” in bankruptcy. They are wrong! Even after the changes to the Bankruptcy Code made in 2005, it is possible to have income taxes forgiven by filing a bankruptcy case.

What are the basic rules? It’s a little complicated, but if the taxes are more than 3 years old, and the taxpayer filed the tax returns more than 2 years before filing the bankruptcy, chances are pretty good that the income taxes can be forgiven through a bankruptcy case.

What governs whether taxes are cancelled in bankruptcy?

It’s the 3 yr/2 yr/240 day rule:

1. The due date for the taxes must be more than 3 yrs before filing the bankruptcy. If he filed his 2006 taxes on or before April 15, 2007 without having an extension of time to file, would have to file the bankruptcy after April 15, 2010. If got extension until Oct. 15, would have to wait until after Oct. 15, 2010.

2. Tax return must be filed more than 2 yrs before filing the bankruptcy (he meets this test).

3. Taxes cannot have been “assessed” or determined to be due by the I.R.S., within 240 days (about 8 months) before filing the bankruptcy.

4. There are a couple of other rules, that I presume there is no problem meeting. #4 Taxpayer(s) cannot have filed a false or fraudulent return. If you just got out of federal prison for tax fraud, that tax is not going to be dischargeable in a bankruptcy!

5. #5 Taxpayer(s) cannot have “willfully attempted to evade or defeat the tax.” Same as above, except you were in prison for tax evasion!

Warning! The above is just a short summary of the actual rules. You should hire an attorney experienced in these matters to review your case and the I.R.S. “transcripts of account” to verify that your taxes are dischargeable, BEFORE filing a bankruptcy. Don’t try this at home! Consult me or a bankruptcy attorney in your area to determine if your income tax is dischargeable.

And remember! These rules apply to income tax only! “Payroll taxes” or the “Trust Fund Recovery Penalty,” different terms for money that YOU WITHHELD FROM AN EMPLOYEE’S PAYCHECK, cannot be discharged in bankruptcy.

You can “wait it out” Payroll Taxes by letting the Statute of Limitations run (if a Revenue Officer doesn’t take all your property in the meantime), or you can compromise it through an Offer in Compromise, or you can pay it out through an Installment Agreement or a Chapter 11 or 13 plan, you just cannot outright cancel it. It is the government’s money. I’ll write more about payroll taxes in a future blog.

Any comments? Let me hear from you!