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.

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.

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!