Articles Posted in Taxes and Bankruptcy

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If you are in trouble with the IRS it is very scary, and now you hear many advertisements on the radio and television from companies that claim they can resolve the problems for pennies on the dollar. Of course, sometimes, that is possible, but in the vast majority of cases, the IRS demands its pound of flesh.

We see many people in our office who owe back taxes to the IRS. If you ignore the IRS, they will levy your wages or bank accounts, leaving you with no money. There are several options available to you to deal with this situation.

1. Installment agreement – You can enter into an installment agreement with IRS to pay off the tax. Interest will still accrue so this may take a very long time, but at least you know that there will be no levies as long as you are current on your payments. This is the least attractive option. Our office can help you in obtaining an installment agreement. However, this is not the promised “Pennies on the Dollar” you heard about in the ads.

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The IRS offer in compromise program has been around for decades. In theory, the program serves the best interests of all concerned, enabling the government to collect what it can from the taxpayer, and relieving the taxpayer a tax burden he cannot pay.

To qualify for an OIC, you must prove that you can’t pay the total balances owed before the collection statute expires, using net equity in assets plus any future income. The IRS calculates future income as the amount it can collect on a monthly basis (monthly disposable income) before the collection statute expires. While the number of OICs accepted by the IRS is small compared with the number of taxpayers who have outstanding balances, more taxpayers are qualifying for and obtaining OICs due to the 2011 IRS Fresh Start Initiative, which softened qualification criteria and allowed for lower offer amounts.

In 2004, the IRS issued a consumer alert warning of promoters’ claims to settle debts for “pennies on the dollar” through the OIC program. The warning addressed companies charging high fees to consumers who may not be eligible for the program; all other payment means would have to be exhausted, including installment payments. It is highly recommended to all that are seeking guidance for tax relief to consult with a qualified attorney such as the attorneys at Campbell & Coombs, P.C.

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These days you hear many advertisements on the radio and television from companies that claim they can resolve your tax problems for pennies on the dollar. These ads refer to “brand new IRS programs” or something called the “Fresh Start Initiative”. What they are really referring to is a program run and administered by the Internal Revenue Service called an Offer in Compromise. The Offer and Compromise (“OIC”) is not a new program and has been around since the 1990s. It is driven by a rather unrealistic formula the IRS uses. According to the IRS, an offer in compromise will be accepted if the amount offered by the taxpayer is equal to or greater than the reasonable collection potential.

IRS records show a dismal success rate for the Offer in Compromise, just a shade under 25%. Why is this? The problem is that many of the companies touting their services as “tax specialists” are anything but, and file Offers in Compromise that have no chance of succeeding from the beginning. These companies are basically scamming you as the taxpayer by taking your money for something that has no chance of success. Here is how the scam works. IRS often files a lien against you when you owe back taxes. These companies get a list of these filings and start sending you letters. They claim that for a huge fee, they can resolve your problems. Typically, the initial fee will be upwards of $6,000 with no end in sight.

Here is all they really do. They are all out of state and there is never a face to face meeting. The never look at your entire situation to see if the Offer in Compromise could ever work. Generally speaking, a successful offer in compromise will come from a taxpayer who has liabilities in excess of his or her assets and little to no disposable monthly income after allowing for basic expenses. Regardless of whether this fits your situation, they will prepare a Form 656 for you. The form will require extensive financial data from you. You will actually do most of the work. When the company files the form, the IRS is supposed to stop all collection activity. The IRS will consider the form for about eight months during which time, your problems magically seem to disappear. After about eight months, the IRS will most likely send a rejection letter or make a counter offer for thousands of dollars more. The company then may request many thousands of dollars more to write an appeal. The entire time, you are out of the IRS collection loop, but interest is still accruing. You don’t know what is happening and you are basically held hostage to the company. If the offer in compromise is accepted you will, quite likely, have to make payments that you cannot afford, and if the offer in compromise is ultimately rejected, you will be right back to square one and you will have extended the statutes governing the bankruptcy and collection of taxes. You end up right back where you started and you will have wasted all the money you paid to the company.

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We see many people in our office who owe back taxes to the IRS. If you ignore the IRS, they will levy your wages or bank accounts, leaving you with no money. There are several options you have to deal with this situation.

1. Installment agreement- You can enter into an installment agreement with IRS to pay off the tax. Interest will still accrue so this may take a very long time, but at least you will know that there will be no levies as long as you are current on your payments. This is the least attractive option. Our office can help you in obtaining an installment agreement.

2. Offer in Compromise- This is what all the ads you see on television or hear on the radio are referring to when they talk about the “New IRS Programs” or “The Fresh Start Initiative”. The Offer and Compromise (“OIC”) is not a new program and has been around since the 1990s. An OIC allows you to pay a smaller lump sum in full satisfaction of the tax debt. It is all formula driven: you must pay to the IRS as much as they would get if they sold basically all of your property and you pay them your monthly disposable income multiplied by 12. Disposable income means your monthly gross income less certain stingy expenses the IRS allows you. The key here is to manipulate the formula so IRS has no choice except to accept the OIC, something IRS seems to try and avoid. When doing an OIC it is important that you choose a reputable local attorney or accountant who has OIC experience. Most of the companies advertising on the radio or internet are out of state and I have never had a client give me a positive comment about them. They tend to take a large retainer from you after making big promises without ever reviewing your case, and then are unable to deliver. When you meet face to face with a local attorney, he can tell you what your chances for success are right then. Sometimes the numbers just do not work for an OIC.

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If tax debt is a substantial portion of your liability and you can qualify, you may want to consider filing a Chapter 13 bankruptcy. Even if the taxes are secured, the majority of courts have held that tax penalties are not secured and are never a priority. The reasoning is that the courts are not willing to penalize the unsecured creditors by giving priority to the penalties. This also applies to interest that has accrued on the penalties. Therefore, the superdischarge remains in effect for tax penalties and the interest that accrues thereon no matter when assessed or when the triggering event happened. (Section 523 (a)(7)(A) and (B); and Section 1328(a). Contrast this with chapter 7 where penalties are dischargeable only if the triggering event causing the penalty is over 3 years old.

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In 2011 The IRS created what they call a “Fresh Start Initiative” which is a series of new steps to help struggling taxpayers with their tax liabilities. In May 2012, the IRS expanded their Fresh Start Initiative by offering more flexible terms to its Offer in Compromise (OIC) program. These are the “New Programs” that you are constantly hearing about on the radio and late night ads from out of state companies that claim to know the “Secrets” of resolving your tax debt. The OIC program is designed to help the most financially distressed taxpayers to significantly reduce their tax liability. Some of the new terms announced in May 2012, include the following:

• Revising the calculation for the taxpayer’s future income.

• Allowing taxpayers to deduct payments to student loans.

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Taxes for which returns were not filed at all or…were filed, but within 2 years of filing a bankruptcy are not dischargeable.

The issue here is not always just the two year date as that becomes relatively easy to calculate.

It is more often whether or not the return is actually a “return” for purposes of this rule.

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Tax debt that is based on your income and for which a return was required to be filed within 3 years prior to the filing of your bankruptcy petition is not dischargeable in bankruptcy. See 11 U.S.C. Sect 523(a)(1)(A).

The “due date” includes extension dates. So if you filed for an extension to Oct. 15. you would not begin counting the three year period until Oct 15.

The 3 year period is also extended by a prior bankruptcy plus 6 months.

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The “small business” is suffering in today’s economic climate. Many have debts that are insurmountable. The “owner” has often also personally guaranteed the debt and is facing bankruptcy.

The question then becomes whether the business entity should file for chapter 7 as well?

Maryland Bankruptcy Attorney Brett Weiss has short list of reasons why he thinks a corporation or LLC will end up using a chapter 7 bankruptcy. His article can be found here.

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If you have serious income tax debt, you have 5 ways to deal with it:

1. Challenge the Assessment

Challenge the amount of the tax by filing correct returns, amending returns, appealing the audit results, litigating the audit results etc.

2. Statute of Limitations Defense

The IRS has a limited period of time to collect debt. If it doesn’t collect within this period, it is generally, out of luck. Many taxpayers are able to use this to their advantage, especially in combination with non collectible status or installment agreement arrangements.

3. Installment Agreement/Non Collectible Status

The IRS must typically allow a taxpayer to set up a monthly payment on what is owed if the taxpayer will comply with a few requirements. The amount paid does not have to be enough to pay the tax debt off within the statute of limitations period. In fact, the amount paid monthly may be nothing. It all depends on the taxpayers ability to pay. This number is based on how much the government will agree that you need to live on, subtracted from your income. Assets are taken into account as well.

These programs are used to pay the debt in full over time, OR to get the taxpayer to the statute period mentioned above. In our office, they are also often used to buy time until the tax debt can be considered “dischargeable” or can be wiped away in bankruptcy.
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