In so much trouble- "Prior Years Taxes" and Bankruptcy

[scaredinnh75]

After being laid off in mid 2008 I was unemployed for a year and 4 months and got some part time jobs thereafter. I am currently employed full time but making 60% less than I did before (like alot of people)

I have over $100,000 in credit card debt from failed business attempts, ect. I have a car with a $700.00 car payment that I simply cannot afford any longer (and I am $5000.00 upside down so I cannot sell it.)

I was going to contact a lawyer regarding Chapter 13 or 7 until I learned about taxes of the "previous year needing to be paid"..

I have filed all of my tax returns for the last 16 years I have been working. But for 2008 (due April 15th 2009 I owed $600.00 to the state of Ma and got a refund of $600.00 Federal. I am on an installment plan with the state and have been paying $40.00 a month.

Last week I get an assessment/audit from the IRS stating that I owe $5000.00 from 2008. Due to the fact that I had a $13000 401K that I took a lump sum to live off of and on my taxes it was filed as ROLLOVER, which it was not. They are completely correct and I have a form to send back to ask for a payment plan on that tax debt.

Now here is the bigger issue- for 2009, which I just filed, I owe the state of Ma $1000.00 and the Federal $1500.00. )I did not have taxes taken out of my unemployment checks.) I relocated to NH in January.

I simply do not have the capability financially of handling all of this debt. If I give back the car to the bank they will garnish my wages (from what I am reading) and I will be left with $200.00 a week. And that's not including credit cards I stopped paying in January.

My questions:

Regarding Prior years tax must be payed- If I filed in July of 2010 does that mean 2009's taxes that I just filed need to be payed? Since I do not have $2500.00, if I set up a payment plan would Chapter 7 or 13 still be disallowed because the full tax owed needs to be payed in full?

Or would I have to wait until 2011 to file? (I will not owe anything for 2010 because since I became reemployed in March I claimed zero and the IRS will be taking any "refunds" in the future to pay off the $6500.00 I owe.

I may not be responsible for being laid off, but I feel like the biggest idiot alive for not handling my finances better when I made a decent living. And now I feel there is no way to come out of this. I have to be able to support myself and keep a roof over my head.

Any advice would be so appreciated.

[Mi Bankruptcy]

I can't really answer your questions about taxes.. However, don't feel like an idiot. People make mistakes. You need to sit down and write out what you have control of and what you don't have control of. Then start working on the things you can control.

[justbroke]

I was going to contact a lawyer regarding Chapter 13 or 7 until I learned about taxes of the "previous year needing to be paid".

Where did you read that or hear that? You only need file your taxes for prior years.

I have filed all of my tax returns for the last 16 years I have been working. But for 2008 (due April 15th 2009 I owed $600.00 to the state of Ma and got a refund of $600.00 Federal. I am on an installment plan with the state and have been paying $40.00 a month.

Perfect.

Last week I get an assessment/audit from the IRS stating that I owe $5000.00 from 2008. Due to the fact that I had a $13000 401K that I took a lump sum to live off of and on my taxes it was filed as ROLLOVER, which it was not. They are completely correct and I have a form to send back to ask for a payment plan on that tax debt.

This is called the "penalty" for early withdrawal. that's why we never suggest that someone take any 401(k) distribution!

Now here is the bigger issue- for 2009, which I just filed, I owe the state of Ma $1000.00 and the Federal $1500.00. )I did not have taxes taken out of my unemployment checks.) I relocated to NH in January.

Sounds like a new installment agreement.

Regarding Prior years tax must be payed- If I filed in July of 2010 does that mean 2009's taxes that I just filed need to be payed? Since I do not have $2500.00, if I set up a payment plan would Chapter 7 or 13 still be disallowed because the full tax owed needs to be payed in full?

You do not have to have prior tax years PAID. In a Chapter 13, you can pay the taxes over 5 years.

I think you received bad information or misunderstood the information presented. You do not need to have all your income taxes paid prior to filing. A Chapter 13 is definitely designed to handle priority taxes, but they do need to be in your Plan and paid over the 3-5 years of your plan duration. The nice thing about a Chapter 13, it stops the IRS interest accrual and, most people don't know this, the penalty portion is actually dischargeable! In other words, all the penalty part may never be paid based on your disposable monthly income / projected disposable income!

[LadyInTheRed]

I was going to contact a lawyer regarding Chapter 13 or 7 until I learned about taxes of the "previous year needing to be paid"..

Stick with your plan to contact a lawyer... or two, or three. I think you are misunderstanding something. It's true that recent tax debt (last 3 years, I believe) is not dischargable, that doesn't mean you can't file for bankruptcy. In a 7 you'd still have the tax debt when you are discharged. In a 13, it is possible your tax debt would get paid during your plan, but some may remain after discharge.

[LadyInTheRed]

I'm too slow!

[scaredinnh75]

"Under the new law, federal tax returns for the last year must be provided as proof of income in both chapter 7 and chapter 13. +++If the taxes for the prior year have not been paid, you must do so before the bankruptcy can move ahead.+++"

^^This is what I have read at many sites^^ It was part of the new Bankruptcy laws in 2005 and it is for Chapter 7 and Chapter 13.

So I am assuming that "the prior year" would be 2009's that I just filed (And I owe $2500 between Ma and Federal)

Are you guys sure?? My taxes for the prior year have not been paid, they have only been filed. I have no way of paying that full amount. My poor grandmother was going to give me the $1000.00 to use towards my bankruptcy..

I know you guys are experts!! I could kiss you all if you are right. The vehicle is killing me and one of my biggest issues. WIthout Bankruptcy protection, I will have no income once they got a deficiency judgement

[justbroke]

+++If the taxes for the prior year have not been paid, you must do so before the bankruptcy can move ahead.+++"

Please tell us what website you got that from. It is absolutely wrong. There is absolutely nothing in the bankruptcy code which even suggests that all taxes must be paid before filing! (I think you got it from lawyers.com and they are completely wrong. It's so funny, that they actually write that garbage in the context of a Chapter 13.)

So I am assuming that "the prior year" would be 2009's that I just filed (And I owe $2500 between Ma and Federal)

Here's the key. In order to file, you must have at least done your federal tax returns for the prior year. So since it's 2010, you would need to file 2009 tax return in order to file. That does not at all indicate, dictate, or suggest that you have to pay any balance due.

Are you guys sure??

Absolutely sure! WHy do you think you can pay off "priority unsecured debt" -- income taxes and other priority debt -- in a Chapter 13? That would mean you didn't pay it.

[StartingOver08]

JustBroke is correct.

Filing your taxes is the important part. If you are currently on an installment agreement with the IRS for your 2008 taxes, once you file Bk Ch 7 then the installment agreement is terminated. Once you are discharged, then you can go back and make new arrangements for an installment agreement for both 2008 and 2009. You can only have one installment agreement at a time with the IRS. If you owe more than one year's worth of taxes, then you just put all of the amounts in one agreement and pay accordingly. The IRS is very good about the this. (Personally I prefer to deal with the local office than the reps over the phone. You usually get a better deal and no lecture).

If you file a Ch 13, then as pointed out, the tax debt is priority debt and paid in your plan payment.

[scaredinnh75]

LOL You got it!! (It was on various law firm websites too) Perhaps "pay your taxes" essentially means "file your taxes".

http://bankruptcy.lawyers.com/Chapter-13-Bankruptcy-Tax-Tool.html

You guys have truly made my day. My month.

[scaredinnh75]

JustBroke is correct.

Filing your taxes is the important part. If you are currently on an installment agreement with the IRS for your 2008 taxes, once you file Bk Ch 7 then the installment agreement is terminated. Once you are discharged, then you can go back and make new arrangements for an installment agreement for both 2008 and 2009. You can only have one installment agreement at a time with the IRS. If you owe more than one year's worth of taxes, then you just put all of the amounts in one agreement and pay accordingly. The IRS is very good about the this. (Personally I prefer to deal with the local office than the reps over the phone. You usually get a better deal and no lecture).

If you file a Ch 13, then as pointed out, the tax debt is priority debt and paid in your plan payment.

I will do just that. I will visit the local office. Thank you so, so much.

[StartingOver08]

Tax Returns
Under the new law, federal tax returns for the last year must be provided as proof of income in both chapter 7 and chapter 13. If the taxes for the prior year have not been paid, you must do so before the bankruptcy can move ahead.

In order for your chapter 13 plan to be confirmed, you must file all tax returns for the four year period before filing for bankruptcy. You must establish that you filed by the first meeting of the creditors. Seven days before that meeting, you are required to provide the trustee with a copy of your most recent federal tax return. If the returns are not filed, a chapter 7 discharge will not be granted and a chapter 13 plan will not be confirmed. Further, if your creditors request a copy of the return, you must provide it for them.

This is from your link. If they had just put "filed" rather than "paid" they would be correct. I think its a proof reading error! LOL

[gmk]

I'm not 100% sure about having to file the 2009 tax return. It isn't due until next week and if you file an extension it isn't due until October. I know the trustee want's to see if you are getting a refund.

I just went over this with my attorney. I will owe a couple of thousand to the IRS for 2009. I had a close to final version of our return drafted that shows this. I also told him I would rather file an extension and he said that's fine, just send him the request for extension. I believe the requirement is for the latest "filed on time" tax returns. So if you go BK before 04/15 (or possibly even 10/15) then your 2008 return is the latest filed if you ahven't already filed 2009.

The above is only for discussion. I don't want to advise anyone on which course to take.

[catleg]

I filed ch13 in Oct 2009.
I had filed my taxes already for 2007 and 2008 including balance due but some other stuff turned up.
I had to file amended returns for 2007 and 2008 and the balance due will be paid by the plan.
In looking at my 2009 taxes it looks like I was underwithheld by about 1k both federal and state.
I can't pay that through my plan, can I?

[justbroke]

I'm not 100% sure about having to file the 2009 tax return. It isn't due until next week and if you file an extension it isn't due until October. I know the trustee want's to see if you are getting a refund.

The Bankruptcy Code is VERY clear about this. You must submit your prior year's tax return to the Trustee.

11 USC 521(e)(2)(A) The debtor shall provide--

(i) not later than 7 days before the date first set for the first meeting of creditors, to the trustee a copy of the Federal income tax return required under applicable law (or at the election of the debtor, a transcript of such return) for the most recent tax year ending immediately before the commencement of the case and for which a Federal income tax return was filed

What your attorney is going to do is to submit the "extension" request. The second part (B) of the part of the code indicates that you can have a reason for not filing. I'm thinking your attorney is going to say that you needed an extension and have filed the extension.

The interest part of the 521 return requirement, reads "for which a... tax return was filed". However, the bankruptcy rules and the U.S. Courts website indicate that, at a minimum, the prior year tax return MUST be filed and submitted to the Trustee. There is a reason why you would want to do this anyhow. If there is any penalty interest or actual tax liability that could be discharged, you would want to know about it.

Whether they hold your case open until you actually file it, is probably what your lawyer is thinking you may be able to avoid, since 521 indicates that you could have a reason not to file it.

[fltoo]

Also, make a list of everything you paid with the retirement funds and give it to the person doing your taxes. Some things are allowed without a penalty.

Some hardship withdrawals include paying for tuition, funeral, eviction, foreclosure, medical and dental bills.

A professional preparer can give you advice.