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.

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.