View From Top of Pike's Peak, Near Colorado Springs, Colorado

Congress passed big changes to the U.S. Bankruptcy Code in 2005, the amendments were known as the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).”  Well, the consumer credit industry was behind the changes, so surprise, the new law doesn’t prevent abuse or protect consumers.

Particularly in the area of income taxes, most notably for my clients with IRS problems, the new law did away with what was known as the “super-discharge” of IRS taxes in chapter 13. It used to be, that if someone was delinquent on filing their tax returns, we could file the bankruptcy, file all the delinquent tax returns, and the taxpayer could usually discharge or cancel the taxes that were more than 3 years old.

But that changed in 2005. The Bankruptcy Code was changed, so that now, taxes for which a tax return was not filed more than two years before filing bankruptcy, are not discharged. Even if you go through a chapter 13 plan, to the extent these “non-priority but non-dischargeable” taxes were not actually paid by the Chapter 13 trustee, they are not discharged, and can continue to pursue you after the chapter 13 is over.

And even if the taxes were paid in full, they can come after you for any unpaid interest and penalties that has accrued.

Only now are we seeing people complete their chapter 13′s, and get billed for this old tax. If this happens to you, and you’re sure that you still owe the IRS for these taxes, your most common remedy is to go on an Installment Agreement (a payment plan) with the IRS, until the balance is paid. If it is a very high balance (over $25,000), you may want to consider an Offer in Compromise, or perhaps another bankruptcy. Consult with an expert IRS Tax /Bankruptcy lawyer for advice before you decide to do anything. I have been working with people with IRS and bankruptcy problems since 1982.

If you live in the Houston, Texas area, for more information about my practice, or to make an appointment, go to my main website at www.jthomasblack.com, or call 713-772-8037.

Bob Casey Federal Courthouse in Houston, Texas

For bankruptcy cases filed after Oct. 16, 2005, the Bankruptcy Code requires chapter 13 debtors to file all tax returns that were due within 4 years of the filing of the bankruptcy petition. It is discouraging and a very bad sign for me, as a bankruptcy lawyer, you have a prospective client sitting in front of me and tell me that they haven’t filed tax returns for many years. I had one guy a couple of weeks ago tell me that he “didn’t know how long” it had been since he filed, and he didn’t know how he would even start. For more information, go to IRS Publication 908.

The problem is, once the bankruptcy is filed, a bankruptcy debtor is under a federal court order (in our district here in the Houston division of the Southern District of Texas) to get all delinquent tax returns filed. And if they are not, bam, the case is going to get dismissed. Our local Bankruptcy Rules require the filing of the tax returns also.

He had come in wanting to stop a foreclosure, he didn’t have much income, and in addition to other problems, when he didn’t have the tax returns done, and didn’t know how he would do it or when he could get around to it, I just had to decline the case, so they guy is likely going to lose his house. You have some basic responsibilities as a U.S. Citizen and one of them is filing tax returns. I understand that people can get behind, and then once you are behind, become afraid to file tax returns because you are afraid of the IRS.

But if you are going to file bankruptcy, the rules are the rules. The GOOD part about getting the taxes filed is, it is done and over with. Once you file the returns, my understanding is that the IRS rarely will try to prosecute you for not filing, as they would trouble proving the “willfullness” element.

Not only that, but if you owe taxes, and you file chapter 13, you can pay the delinquent taxes out over a long period of time, up to 60 months, usually without interest. To know what would happen in your particular case, call my office at 713-772-8037 and make an appointment. Or go to my website at www.jthomasblack.com, you can make an appointment directly on the website.

The official IRS website explains it like this:

Through the Federal Payment Levy Program (FPLP), Social Security benefit payments outlined in Title II of the Social Security Act, Federal Old-Age, Survivors, and Disability Insurance Benefits, are subject to the 15-percent levy, to pay your delinquent tax debt.

However, benefit payments, such as lump sum death benefits and benefits paid to children, will not be included in the FPLP. Additionally, Supplemental Security Income (SSI) payments, under Title XVI, and payments with partial withholding to repay a debt owed to Social Security will not be levied through the FPLP.

Before your Social Security benefits are included in the FPLP, we will send you a final notice of our intent to levy, with appeal rights, if one has not already been issued. If we don’t hear from you, or if you have already received this notice, we will send you an additional notice CP 91 or CP 298, Final Notice Before Levy on Social Security Benefits, explaining that your Social Security benefits may be levied. See Tax Information for Appeals for additional information about your appeal rights.

You have 30 days from the date of this notice to make arrangements to pay your tax debt before we begin deducting 15 percent from your monthly benefit. See Topic 201, The Collection Process,  Publication 594, The IRS Collection Process, and Publication 1, Your Rights as a Taxpayer, for additional information.

Because the FPLP is used to satisfy tax debts, the IRS may levy your Social Security benefits regardless of the amount. This is different from the 1996 Debt Collection Improvement Act which states that the first $750 of monthly Social Security benefits is off limits to satisfy non-tax debts. Fifteen percent of the Social Security benefit will be levied through the FPLP regardless of whether or not the remaining benefit sent to you is less than $750.

So, it’s not all bad news. But if you want to deal with the IRS head-on, income taxes can be discharged in bankruptcy, so long as they (1) are more than 3 years old measured from the due date of the return (2) you filed the tax returns more than 2 years before filing bankruptcy; and (3) the taxes have not been “assessed” or determined to be due, within 240 days before filing bankruptcy.

You also cannot have filed a false or fraudulent tax return, or willfully attempted to evade or defeat the tax (you cannot be a crook, tax evader or tax protester and qualify for bankruptcy discharge of your taxes).

Or if the taxes are not old enough to discharge in bankruptcy, or if you don’t qualify for some other reason (too much income) it is possible to use Chapter 13 bankruptcy and pay the taxes back, usually without interest, over a plan of up to 5 years in length. Meanwhile the IRS cannot levy on your pay, bank accounts, or other property; they have to leave you in peace.

If you live in the Houston Texas area or surrounding counties, you can come in for a free consultation with me to discuss your options. Call my main number at 713-772-8037, or you can make an appointment on my web site at www.jthomasblack.com.

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.

The same kind of thing can happen with refunds. You file the tax return, and then move. Or you are in the middle of moving. Or something else. And the tax refund gets mailed to an old address. Well, the IRS has a LOT OF MONEY for someone. If you are due a refund, you can check on the status of it using the “Where’s My Refund” feature on the IRS website. Read about how the IRS is handling all these refunds, in their official bulletin reprinted below:

WASHINGTON — The Internal Revenue Service is looking for taxpayers who are due to receive a combined $123.5 million in the form of 107,831 refund checks that were returned to the IRS by the U.S. Postal Service due to mailing address errors.

“We are eager to get this money into the hands of taxpayers, so don’t delay if you think you are missing a refund,” said IRS Commissioner Doug Shulman. “The sooner you update your address information, the quicker you can get your refund.”

All a taxpayer has to do is update his or her address once. The IRS will then send out all checks due. Undeliverable refund checks average $1,148 this year, compared to $990 last year. Some taxpayers are due more than one check.

Average undeliverable refunds rose by 16 percent this year, which is in line with the 16 percent rise in average refunds for all tax returns in the latest filing season. Several changes in tax law likely played a role in boosting refunds, including the First-Time Homebuyer’s Credit and the Recovery Rebate Credit, among others.

The vast majority of checks mailed out by the IRS each year reach their rightful owner. Only a very small percent are returned by the U.S. Postal Service as undeliverable.

If a refund check is returned to the IRS as undeliverable, taxpayers can generally update their addresses with the “Where’s My Refund?” tool on IRS.gov. The tool enables taxpayers to check the status of their refunds. A taxpayer must submit his or her social security number, filing status and amount of refund shown on their 2008 return. The tool will provide the status of their refund and in some cases provide instructions on how to resolve delivery problems.

Taxpayers checking on a refund over the phone will be given instructions on how to update their addresses. Taxpayers can access a telephone version of “Where’s My Refund?” by calling 1-800-829-1954.

The IRS encourages taxpayers to choose direct deposit when they file their returns because it puts an end to lost, stolen or undeliverable checks. Taxpayers can receive refunds directly into personal checking or savings accounts. Direct deposit is available for filers of both paper and electronic returns.

The IRS also encourages taxpayers to file their tax returns electronically because e-file eliminates the risk of lost paper returns. E-file also reduces errors on tax returns and speeds up refunds.

E-file coupled with direct deposit is your best option; it’s easy, fast and safe.

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.

Shark (in a tank) at Moody Gardens, Galveston Texas

If you own a business that has employees, and the business doesn’t pay the “withholding” or payroll taxes to the I.R.S., the I.R.S. is going to come after you, personally, for the amounts that were withheld from the employees’ paychecks.

This used to be called the “100% penalty” but is now known as the Trust Fund Recovery Penalty. It’s not really a penalty in a way, because the I.R.S. is not trying to collect any additional tax, they are just assessing the tax against the owners or other “responsible persons” who are legally liable for the tax.

This Trust Fund Recovery Penalty is not dischargeable in bankruptcy. It is considered the government’s money, and they have to give your employees credit for it, so you cannot get rid of or cancel this in bankruptcy. However, it is possible to pay it out over time, and only pay what you need to.

For example, so long as your business was an LLC or corporation, and assuming it is out of business and has no assets, the entity’s share of the tax (the corporation’s matching share of FICA and Medicare) does not have to be paid, as it is collectible only against the entity, the LLC or whatever.

As to the Trust Fund Recovery Penalty itself, if other responsible people will not pay it (the IRS is only entitled to one satisfaction of the payroll taxes), then it is possible for you to enter into an Installment Agreement, or possibly even do an Offer in Compromise, to resolve the Penalty.

If not, and you have regular income, you can pay the Penalty out over no more than 5 years in a Chapter 11 Reorganization or 13 Debt Adjustment plan, possibly without interest. In any event if you file a bankruptcy plan, the IRS is stopped from taking collection actions against you.

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!