File your tax returns before the IRS does a tax assessment, or you could lose your right to discharge taxes

Income taxes may sometimes be discharged in a personal bankruptcy without full payment of the tax. For example, this might be true if the return is timely filed and more than three years have gone by since the last due date for the return, or if the return were filed late and more than 2 years have gone by. But, waiting too long can have dire results as Thomas Giacchi found out the hard way.

Mr. Giacchi did not file his 2000-2002 federal tax returns until after the IRS had estimated and assessed his taxes for those years, without his help. Only then did he file late returns, which showed he owed less than what the IRS estimated. He filed a Chapter 7 bankruptcy more than 3 years after his returns were filed and got a discharge. He then went back to bankruptcy court and filed suit asking the bankruptcy court to rule that his taxes for those years were discharge. He lost, and on appeal the Third Circuit Court of Appeals agreed.

The problem for Mr. Giacchi is that for a bankruptcy discharge he had to have filed a return that represented “an honest and reasonable effort to comply with the tax law”. Following other circuit courts of appeal, the Third Circuit held that filing a return after the IRS had already gone to the trouble of calculating his tax did not meet this test. Under the tax laws, “the purpose of a tax return is for the taxpayer to provide information to the government regarding the amount of tax due”  and once the IRS has to calculate the tax due without this assistance, a later tax return is no longer an “honest and reasonable attempt to comply”

If only Mr. Giacchi had filed sooner, he might have been able to discharge the old tax liabilities.

A word to the wise: file before the IRS catches up to you.

While we are not tax attorneys or qualified to give tax advice, we recommend not ignoring tax obligations.

[IRS CIRCULAR 230 DISCLOSURE:  Pursuant to Treasury Regulations, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used or relied upon by you or any other person, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax advice addressed herein]

Chapter 13 to Manage Tax Arrearages

Managing Tax Debt with a Chapter 13 Plan

IRS buldingAs a general rule, a bankruptcy discharge will not remove personal liability for most tax debts. See our previous blog post on that subject. Generally, taxes that are non-dischargeable are also entitled to a priority in payment in Chapter 13, and must be paid in full over time under an approved Chapter 13 plan. Those debts that are not “priority debt” will be discharged with the same right to payment as other “non-priority, unsecured debt” such as credit cards. That debt will be pooled with other similarly situated debt, such as medical expenses and credit card debt, and the amount of payments on those debts depends on a number of factors, including how much income is available after priority and secured debt have been paid. Often, these debts are only partially paid, with any amounts still upon completion of all plan payments being discharged.

Tax Liens may be subject to “cram down”

Taxing authorities such as the IRS and states such as New Jersey will obtain tax liens by various means. For the IRS to have a valid enforceable lien in a New Jersey bankruptcy, it must file a Notice of Tax Lien in the county where you own real estate, or where you reside or where a business has its principal place of business. Unless modified, these liens must either be satisfied or remain undisturbed in a Chapter 13 bankruptcy. This would mean that the lien is still attached to real estate or other property when the bankruptcy is over.

However, under a procedure called “cram-down” a tax lien can be reduced to the value of all property to which it attaches, and if that amount is paid, can be removed at the end of a case. For example, if John has $120,000.00 in IRS liens, but the total value of everything he owns, (including profit sharing plans) is only $50,000.00, then he is permitted to pay only $50,000.00 and upon paying that amount to the IRS in his Chapter 13 plan, the lien will be discharged and removed.

Taxes are complex and specialized advice is needed. IRS CIRCULAR 230 DISCLOSURE: Pursuant to Treasury Regulations, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used or relied upon by you or any other person, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax advice addressed herein.

Contact Neuner & Ventura, LLP

At Neuner & Ventura, LLP, we know that the bankruptcy process can be intimidating and confusing. We offer a free initial consultation to every client. For an appointment, call our office at (856) 596-2828 or send us an e-mail. We do, however, reserve the right to charge a fee to review any work done by another attorney. Evening and weekend appointments are available upon request.

Representing Clients across South Jersey

When Tax Debts Can Be Discharged in Chapter 7

Can You Discharge Tax Debt in Chapter 7?

Tax paperworkIn a Chapter 7 bankruptcy filing, you can discharge certain debts in exchange for the sale of non-exempt property. As a general rule, domestic support obligations, such as child support and spousal support, are not dischargeable, and student loan payments are only rarely dischargeable in cases of undue hardship. The common perception is that tax debts may not be discharged in Chapter 7, but this is not entirely true.

The Discharge of Tax Debts in Chapter 7

Certain types of tax obligations may not be discharged under any circumstances. These include taxes which a debtor is required to collect and submit to the taxing authority, such as excise or sales taxes and money withheld an employee’s pay for taxes or Social Security by such as FICA taxes) that was not in fact paid over.

Income taxes and the interest on them (but not tax penalties for failure to file a return or pay a tax) CAN be discharged providing all the following is true:

  • The tax was not incurred as the result of fraud or of willful tax evasion—If the taxing authority can show any instance of intentional evasion or misrepresentation, the tax cannot be discharged.
  • A tax return for the specific tax year or tax period was actually filed. Substitute returns that the IRS or a taxing authority prepares to estimate the tax due do not qualify.
  • The tax return was timely filed, and the last due date to file the return was more than three years before you filed for bankruptcy. Note this is not the date the return was filed, but the date was last due. Thus, if due to extensions the return was due by October 30 but you filed on September 30, the three year look-back runs from October 30.
  • If the return was filed late, it was filed more than two years before your bankruptcy filing.
  • If the taxing authority issued an assessment of tax liability, that was more than 240 days (plus certain additional time for various reasons) prior to your bankruptcy filing.

Even if your personal liability for a tax is dischargeable, there may be tax liens filed that will survive a bankruptcy unless something is done about them. These liens attach to your property. More about them in a later blog post.

IRS CIRCULAR 230 DISCLOSURE: Pursuant to Treasury Regulations, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used or relied upon by you or any other person, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax advice addressed herein.

Contact Neuner & Ventura, LLP

We understand the stress, anxiety and confusion that can be associated with a potential bankruptcy filing. We offer a free initial consultation to every client. For an appointment, call Neuner & Ventura at (856) 596-2828 or send us an e-mail. We do, however, reserve the right to charge a fee to review any work done by another attorney. Evening and weekend appointments are available upon request.

Representing Clients across South Jersey

How to Avoid Tax Levies and Garnishments

The Common Tax Mistakes You Want to Avoid

Tax burden illistrationUnder the federal bankruptcy laws, most taxes are not dischargeable. That means that you cannot rid yourself of income taxes, sales taxes or payroll taxes that you owe by filing a Chapter 7 petition, with very limited exceptions. In a Chapter 13 bankruptcy case, most taxes will have to be paid in full over the course of three to five years. While the Chapter 13 is pending, however, and you will enjoy the benefits of the automatic stay, which prohibits the taxing authority from taking any other action to collect past-due taxes.
The best way, however, to deal with tax arrearages is to avoid incurring them in the first place. The most common sources of tax debt arise from:

  • Failure to file a return and pay a tax — If you don’t file a tax return, the IRS or the state will do it for you, using past income records to “estimate” a tax for you that is usually more than you really owe. Don’t fail to file simply because you can’t afford to pay the tax. Always file and pay what you can afford to pay.
  • Failure to set aside funds for taxes — too many people who are self-employed fail to set aside money to pay estimated taxes. For most small businesses, this money should be taken out of the main business operating account and put into as separate “tax account” that becomes a separate escrow fund. A benefit of this strategy is that tax escrow accounts cannot be attached by creditors. Another benefit is that this money cannot be depleted if for example, a customer’s check bounces.
  • Failure to collect and pay sales tax — This is typically a state or municipal matter. These taxes are non-dischargable. In New Jersey, anyone who had decision making authority over whether or not to pay these taxes or other bills can be found personally liable.
  • Failure to pay payroll taxes when due —when you deduct money from an employee’s paycheck, you are taking their money to pay their taxes for them. Government taxing authorities take a very hard line on the nonpayment of FICA and other payroll taxes. Again, any person with authority to pay the debts of a business may be liable for nonpayment, and the government can assess a 100-percent penalty for nonpayment.
  • Not keeping good and accurate business records. Self explanatory.
  • Trying to avoid paying employee taxes by calling workers “independent contractors” instead. The distinction between employees and independent contractors is complex. But if the worker has regular hours and is supervised on the job, they are probably employees. If a stated auditor investigates and determines that they are really employees, the business and business owners can become liable for all the money that they failed to collect from the workers as employees. Bad news!

Here again, prevention is the best cure. Get qualified tax and legal advice. If you are in trouble, seek qualified advice sooner rather than later.

Contact Our Office

At Neuner & Ventura, LLP, we offer a free initial consultation to every client. We do, however, reserve the right to charge a fee to review any work done by another attorney. Let us help you minimize the stress, anxiety and confusion that come with a personal bankruptcy filing.

For an appointment, call Neuner & Ventura at (856) 596-2828 or send us an e-mail. Evening and weekend appointments are available upon request.

Representing Clients Across Central and Southern New Jersey

IRS CIRCULAR 230 DISCLOSURE: Pursuant to Treasury Regulations, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used or relied upon by you or any other person, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax advice addressed herein.

How to Stop IRS Garnishments and Levies

Using Bankruptcy to Deal with Tax Problems

Hand written time sheetIf you have incurred tax liabilities and the IRS has either garnished your wages or threatened to levy your assets, you may have considered bankruptcy as a way to deal with the problem. A bankruptcy filing can help you manage tax arrearages, but there are specific restrictions.

Important first steps.

First, you need to assemble all your returns for which money is owed. If you have not filed any returns, now is the time to get them prepared and file them, even if you do not have the money to pay. You should have the advice of a qualified accountant or tax adviser.

If you do not have the returns, you or your tax adviser can request a tax transcript.

Take note if any state or federal tax liens have been filed. Federal tax liens are generally filed in the county where you live. In New Jersey, tax liens are called “debt certificates” and are docketed as judgments.

Using Chapter 7 to Address Tax Liabilities

Typically, a Chapter 7 liquidation proceeding is not the best way to resolve a tax liability. Most tax debts are simply not dischargeable in a Chapter 7 proceeding. To be discharged in a Chapter 7 case, a tax obligation must be:

  • Income based — you cannot discharge unpaid sales taxes, excise taxes, or taxes for money you collected from employee payroll but did not pay over to the taxing authority.
  • For a return that was last due at least three years ago and for which you actually filed a return no later than two years ago.
  • For a tax that was assessed at least 240 days ago
  • For a debt that was not incurred through fraud or willful evasion.

This is a simplified discussion. The rules and their application are more complex. Some taxes and most tax penalties can be discharged.

Because of the difficulty of discharging most tax debt, the practical effect of filing a Chapter 7 petition is that it will get you relief while the Chapter 7 case is in process, but the taxes and interest (but not most penalties) will immediately become due again once the Chapter 7 is complete.

Using Chapter 13 to Manage Tax Debt

With a Chapter 13 filing, you will be entitled to the automatic stay, which applies to tax obligations. You will then propose a plan that must provide for full repayment over a period of up to five years of all “priority” tax obligations. As long as you make your payments as agreed, the tax authority may not seek to accelerate the amount due or attempt to collect more than you have agreed to pay.

Dealing with IRS or state tax liens

Often, the IRS or state taxing authorities will have filed tax liens. Unless paid or otherwise dealt with, these liens remain after bankruptcy, allowing collection of any otherwise unpaid balance out of income or property. In a Chapter 13 case, it may be possible to “cram down” these liens to the actual value of all your property.

Any way you look at it, tax problems are serious business. While we are not qualified tax attorneys or tax advisers, we can help you use and apply bankruptcy, in conjunction with your accountant or tax adviser.*

Contact Neuner & Ventura, LLP

At Neuner & Ventura, LLP, we provide a free initial consultation to every client. We do, however, reserve the right to charge a fee to review any work done by another attorney. To set up a meeting, call Neuner & Ventura at (856) 596-2828 or send us an e-mail. Evening and weekend appointments are available upon request.

Representing Clients Across South Jersey

*IRS CIRCULAR 230 DISCLOSURE: Pursuant to Treasury Regulations, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used or relied upon by you or any other person, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax advice addressed herein.

US Supreme Court holds that inherited IRA’s are not “retirement funds” that can be exempted in bankruptcy, but New Jersey residents may have other protections

We previously reported that the Seventh Circuit Court of Appeals held that inherited IRA’s were not protected by the Bankruptcy Code’s IRA exemption. The Supreme Court agreed, in a ruling issued June 12, 2014. Clark v Rameker. This means that debtors in bankruptcy cannot count on being able to keep such IRA’s under the federal IRA exemption, 11 USC 522(b)(3)(C). However, debtors who live in New Jersey may still be able to rely on a separate statute that removes IRA’s from a bankruptcy estate. NJSA 25:2-1(b). Because that statute has broader wording than the federal exemption statute, it may shelter inherited IRA’s. But in view of the Supreme Court’s decision, there may be some open questions here.

In Rameker, the Debtor’s mother named Mrs. Clark the beneficiary of an IRA. Under the applicable tax code sections, 26 USC 408 and 408A, the Debtor could either take the IRA funds outright, or roll them over into an “inherited IRA”. Unlike regular IRA’s, the money in these IRA’s can be taken out any time without penalty, and no additional money can be put into them. The Trustee objected to Mrs. Clark’s claim of the entire inherited IRA as exempt, and the exemption was overruled by the 7th Circuit. The Supreme Court agreed, finding that as Congress wrote the exemption, it applied only to “retirement funds”, which, it found, inherited IRA’s were not. The critical distinction was the ability to pull the funds out at any time and to use them for any purpose as well as the inability to add to the account. Funds in an inherited IRA, it found, “constitute ‘a pot of money that can be freely used for current consumption'”

Bad news outside of New Jersey. But New Jersey passed a law intended to shelter “any property held in a qualifying trust and any distributions from a qualifying trust, regardless of the distribution plan elected for the qualifying trust” NJSA 25:2-1(b). A qualifying trust is defined as “a trust created or qualified and maintained pursuant to federal law, including, but not limited to, section 401, 403, 408, 408A, 409, 529 or 530 of the federal Internal Revenue Code of 1986” Id. There is no reference to retirement funds. And such property or distributions are “exempt from all claims of creditors and shall be excluded from an estate in bankruptcy, subject to certain exceptions.

Does this state law supercede contrary limitations in the Bankruptcy Code? The Third Circuit Court of Appeals held it did in In re Yuhas, 104 F.3d 612 (3d Cir 1997), cert denied, 521 U.S. 1105 (1997). For now at least, that would seem to answer the question.

But if someone were to push the issue, we wonder whether the New Jersey exclusion would withstand further scrutiny by the Supreme Court. States are given only limited powers in bankruptcy matters. They are allowed to “opt out” of the Bankruptcy Code’s exemption scheme and craft their own exemptions in bankruptcy. New Jersey has not done that. So how can New Jersey declare that a broad range of assets are “exempt”?

Moreover, New Jersey has purported to “exclude” these “qualified trusts” from an estate in bankruptcy. The Bankruptcy Code treats certain types of assets, whether or not an exemption is available, as “excluded” from a bankruptcy estate. 11 USC 541(c)(2). Examples are ERISA qualified pensions, and assets in valid spendthrift trusts.  One can argue that New Jersey’s attempt to re-write this section of the Bankruptcy Code falls afoul of the Constitution’s mandate that bankruptcy laws be the sole province of federal law, and for that reason is invalid. But the counter-argument is that New Jersey law determines what is a valid trust Bankruptcy Code section 541(c)(2) excludes from the bankruptcy estate.  If NJSA 25:2-1(b) is seen as declaring all such “qualified trusts” to have the same protections as otherwise valid “spendthrift trusts” (ie those created with a provision that no part of the trust can be levied, pledged, or encumbered), the validity of the statute could stand unimpeded.

For now, attentive bankruptcy practitioners, especially outside New Jersey, need counsel their clients accordingly.

 

How Chapter 13 Really Works When You Owe Income Taxes

Reorganizing Tax Debts through a Chapter 13 Filing

As a general rule, most income tax obligations cannot be discharged in a Chapter 7 bankruptcy filing. You can, however, include tax debt in a Chapter 13 reorganization. When you do, you will propose a “Plan” that includes arrangements to repay or otherwise deal with your tax debts over 3 to 5 years. Just as important, you will have the benefit of the automatic stay, which prohibits the IRS, state treasury departments and other revenue agencies from calling, writing or taking legal action to collect a debt from you while the bankruptcy is underway. You can also challenge the amount claimed due as taxes in the “friendly” forum of a bankruptcy court, rather than a more distant “tax court”.

How It Works

When you include tax debt in a Chapter 13 reorganization filing, that debt will be classified either as priority debt or non-priority debt. Priority debts must be repaid in full as part of a reorganization plan, but non-priority debts need not be fully paid. Non-priority debts include most tax penalties. Older tax debts may also be non-priority. Since most tax debts cannot be discharged in Chapter 7, filing for protection under Chapter 13 will provide the added advantage of forcing the taxing authorities to accept payment out over a longer period of time at lower interest. If you file for Chapter 7, your tax debt will still be due in full after your discharge.

Priority tax debt includes:

  • Income taxes due under a timely filed non-fraudulent tax return which was last due over 3 years ago.
  • Any taxes you were required to collect or withhold, such as sales or use taxes, and income tax, employment taxes, Medicare and Social Security for employees
  • Excise taxes or customs duties

Even if the tax does not fit into this category, there may be tax liens against your property. These liens will remain if not satisfied or dealt with in bankruptcy. In a Chapter 13 case, it may be possible to substantially reduce the amount of these liens.

Tax issues in bankruptcy are complex and very fact specific. Qualified legal and tax advice is very important. We have helped many people obtain relief from taxes through bankruptcy.

Contact Neuner & Ventura, LLP

Let us help you take back control of your life! We understand the stress, anxiety and confusion that can be associated with a potential bankruptcy filing. We offer a free initial consultation to every new potential bankruptcy client. (We do, however, reserve the right to charge a fee to review any work done by another attorney). For an appointment, call Neuner & Ventura at (856) 596-2828 or send us an e-mail. Evening and weekend appointments are available upon request.

Representing Clients across South Jersey

IRS CIRCULAR 230 DISCLOSURE: Pursuant to Treasury Regulations, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used or relied upon by you or any other person, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax advice addressed herein.

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