TAX LIABILITY
There are three (3) phases in effectively dealing with a client’s income tax liability owed to a governmental authority.
PHASE ONE
GET THE CLIENT OUT OF ‘NON-COMPLIANCE’ STATUS AS SOON AS POSSIBLE!
Most folks do not know that it is a federal crime not to file a timely, non-fraudulent tax return each year ! The failure to file on time is ‘willful’ (“I’ll file it when I get around to it”) is usually punished as a misdemeanor. However, if you failed to file, and committed an act that is deemed to be tax ‘evasion’, you can be charged with a federal felony. In either circumstance, you could end up in jail.
In addition to possible criminal charges, the IRS and State have several other unpleasant weapons to use against you. If the return is not timely, there is a 5% penalty on anything that was owed, but not paid. Each month thereafter, an additional penalty of 5% of what was owed is added each month thereafter, not to exceed 25% of the sum due. The government can also seize/intercept any refund(s) to which you may be entitled in the future until the liability is paid.
Moral of the Story - file your honest returns before the filing deadline each year even if you can pay none of it at that time ! With limited exceptions, you cannot be put in jail if the return was filed on time, it is completely truthful, and there was no attempt to evade tax liability. It doesn’t matter if you owe $250,000.00 for that year - you still have not committed a crime.
The Spiroff Law firm can help you become a ‘compliant tax filer’ (an IRS term of art). If the returns are simple (W-2's only, retired persons, etc.) we can assist you in preparing and filing those.
If the returns are complex (business returns, many years of unfiled returns, divorces, etc.) you will most likely be referred to one of the tax lawyers with whom we have worked for many years to bring you back within compliance with the law.
PHASE TWO
FORMULATE A PLAN OF ATTACK WITH SPIROFF LAW OFFICE TO GET THE TAXES PAID UNDER THE SIMPLEST TERMS
Once it is determined whom you owe, how much you owe, and from which tax year, it is time for Spiroff Law Office to go to work. Your days of suffering from “Ostrich Syndrome” (burying one’s head in the sand hoping the problem is going to go away) are OVER. We will sit down together in order that all of your many questions are answered. At that time, we will attempt to get you to relax a bit so we can move on to the final Phase of the plan to get you where you want/need to be.
PHASE THREE
NOW THAT WE KNOW ALL OF THE FACTS, WHAT IS THE BEST WAY OUT OF THIS MESS?
We’ve gotten you ‘compliant’. We know whom, and what you owe. Now what? Below are some of the most common remedies we use to rectify tax problems, but is in no way all of the tricks we have learned over the years:
OFFER IN COMPROMISE
An offer in compromise is a ‘deal’ that is cut with the IRS, or State where the government agrees to accept less than what is actually due. There are some prerequisites, however.
The taxing entity will make you fill out a questionnaire, and verify all of your assets. The purpose is for them to see if there is anything that could be seized and sold to claw back the largest amount of money possible to apply to your liability. We will assist you with this process. If the government deems you ‘marginally collectible’ or ‘uncollectible’, an offer in compromise may be an option.
Keep in mind, however, that in consideration for the government accepting less than owed, it is almost always required that the lesser sum be paid in a lump sum on a specified date in the near future. In sum, you generally need a ‘war chest’, or have liquid property with which you are willing to part to pursue an offer in compromise.
INSTALLMENT PAYMENT AGREEMENT
This is becoming a favorite tool being used by the government in the past couple of years. It is much less cumbersome, and time-consuming like an offer in compromise.
Essentially, we prepare forms and submit them to the government indicating the minimum amount you can comfortably pay each month. Based upon experience, the government has been routinely accepting offers that are reasonable in nature (as opposed to ‘low-ball’) offers. Remember, it knows how much money you make each year.
The advantage here is the high success rate we achieve for our clients, and the relatively simplistic process that saves the client money. There is a ‘bear trap’ here, however. The balance due continues to accrue interest on the descending balance of your. The Spiroff Law Office will review this situation with you when we are formulating the installment proposal you would like to propose.
BANKRUPTCY RELIEF & DISCHARGE
As a general rule, taxes are one of the 23 items that cannot be discharged (gotten rid of) in a bankruptcy. Most tax debt cannot be completely wiped out through a bankruptcy filing. However, you can obtain significant relief from a strategic bankruptcy strategy, and place yourself in a position to be able to easily manage your tax liability.
The IRS rules only allow discharge of taxes in bankruptcy if the taxes meet certain conditions. If you do not meet every one of these or if you miss a deadline even by a day, the tax may be due at the end of your bankruptcy proceeding. Here are the applicable conditions:
Income Tax Rule
The tax must only be income tax liability (most business-related taxes are specifically excluded from discharge).
3 Year Rule
You can only include taxes that are at least three years old from the date that last return was due, or upon expiration of any extension you were allowed.
2 Year Rule
You must have filed the returns at least 2 years ago for the taxes you are attempting to discharge. For example, you cannot file a late return from 4 years ago immediately before filing bankruptcy, and get rid of those taxes.
No Substitute Return Rule
A ‘substitute’ return is when the IRS files a return on your behalf. You cannot discharge taxes owed from a substitute return in bankruptcy.
240 Day Rule
If the IRS makes changes to your return, or adds to your unpaid taxes - that is a tax assessment. You can only include assessed taxes if the assessment occurred within 240 days of the filing of your bankruptcy case.
No Fraud Rule
Just like it sounds. If it is proven that you attempted/committed tax evasion or fraud, you cannot include those taxes in your bankruptcy - you must pay those along with any penalties and interest thereon.
As you can see, discharge of income tax liability in bankruptcy is one of the most complex portions of the Bankruptcy Code. You would think that discharging income taxes has would become a streamlined process over the years. It is nothing of the sort - in every case, and the hundreds of thousands of dollars we have discharged for clients, there is a factual quirk that arises.
Below are some of the common questions we get from clients who desire to rid themselves of as much prior income tax liability as possible through a bankruptcy filing:
Get organized! Buy some expandible files. Go through all of your past records and papers, and first sort them by year. Then, arrange them in chronological order for each tax year. Separate income from expenses. Find your W-2s or 1099s from the tax years in question. If you have been divorced, or a spouse has passed away, gather all of those documents as well. Once organized call the Spiroff Law Office for further assistance in putting this worry to rest for good.
Unfortunately, the government already knows what you made from your W-2, 1099, etc. If you cannot produce the receipts, you will simply have to pay the tax due without the benefit of any itemized deductions for that year. If you do not itemize expenses, your standard deduction(s) still may able to be used for your benefit.
Not a lot if we are assisting you with a ‘simple’ return. However, complex and business returns will most likely need the expertise of a CPA/tax lawyer. Depending on complexity, and your level of prior organization, fees usually run around $1,000.00 for a non-business matter.
Yes, the government can usually provide you with copies of the actual returns from the last 3 years. However, we will need to assist you in submitting the proper forms to the proper place in order to obtain transcripts (essentially, summaries) of the older returns.
While we hate ‘wishy-washy’ answers, it depends. Tax liability, and the discharge of that obligation, is very fact-specific so the decision on a particular Chapter will depend on your specific circumstances. Just be sure you have someone analyze your situation who has traveled this road for a few decades.
The short answer is ‘no’. A bankruptcy discharge (under Chapter 7 or 13) will not wipe out tax liens previously recorded for record by the lien holder. While your personal liability may be discharged (you no longer personally owe taxes), this does not remove the lien from your real estate, or other certain property. If the IRS recorded a tax lien on your property before the bankruptcy filing, the lien will remain on the property. You will have to pay off the tax lien in full before selling or transferring the property's title to a new owner. In this situation, Chapter 13 would most likely be your preferred course of action.
The short answer is ‘no’. A bankruptcy discharge (under Chapter 7 or 13) will not wipe out tax liens previously recorded for record by the lien holder. While your personal liability may be discharged (you no longer personally owe taxes), this does not remove the lien from your real estate, or other certain property. If the IRS recorded a tax lien on your property before the bankruptcy filing, the lien will remain on the property. You will have to pay off the tax lien in full before selling or transferring the property's title to a new owner. In this situation, Chapter 13 would most likely be your preferred course of action.