A Tax Client

[MSbklawyer]

I recently undertook to prepare a chapter 13 for a client who hasn't filed a tax return in 10 years. (I will never take such a case again.) He just didn't bother to file for whatever reason. He came to work one day and his employer presented him with a tax levy on his wages -- the IRS was taking his WHOLE paycheck until further notice. The IRS is not limited to the 25% that us mere mortals must abide by. Needless to say, that got his attention.

So we prepared a skeleton 13 for him to get the levy stayed, and now we're in the process of preparing the plan. We're also getting a CPA to prepare his back tax returns so we can get some kind of handle on exactly how much the guy owes. So here's the hard part:

None of the taxes are dischargable since he didn't file the returns. So he has a nearly insurmountable tax debt. Now the taxes are also priorityin full over the life of the plan unlessin bankruptcy, he clears $250 per month. If he stays out of bankruptcy, the levy goes back into place and he clears $0 per month. He's in the type of business that he could work and get paid under the table, but he's not too far from being charged criminally as it is and I don't want to see that happen. But at the same time, he has to do what he has to do to live.

Does anyone see another way if the IRS will not agree to let him pay less than in full? He knows he was stupid not to file his taxes but he wants to get back on the straight and narrow, but feed his family at the same time.

I know that this situation is probably beyond the scope of this forum, but I've talked to other lawyers about it and we just can't find an out for the guy.

[DeadManCrawling]

Wow.

All I can say is WOW.

This is America, circa 2009?

Wow.

I'll think on this, and have come up with some creative ideas, but this fellow sounds like he is as screwed as possible.

The only immediate thought is this:

In either scenario you provide, can the family apply for food stamps, WIC, and other government programs to at least provide food? That is, how do those programs calculate income? If the IRS levy counts as income, these people could starve.

I hope this works out, but please do keep us informed. It is truly incomprehensible that this scenario could play out.

[DeadManCrawling]

Perhaps involving the media could help.

A family of FIVE starving to death to pay the IRS could at least get some local (if not national) headlines in this economy. IRS, like many public companies, can often be swayed by negative publicity.

It's a thought, anyway.

Best,

-dmc

[HHM]

I am sure you batted this around, but why is the guy not an Offer in Compromise candidate? It's at least worth a shot, you can try both a doubt as to collectability and effective tax administration Offer. Has the guy tried to propose an Installment Agreement.

How much tax are we talking about?

You might think about a chapter 11, if push comes to shove, there is no limit on the length of a chapter 11, but if the guy is barely making it, I doubt he can afford the administrative upkeep of a chapter 11.

[MSbklawyer]

I am sure you batted this around, but why is the guy not an Offer in Compromise candidate? It's at least worth a shot, you can try both a doubt as to collectability and effective tax administration Offer. Has the guy tried to propose an Installment Agreement.

Yeah, but with the OIC, they want a lump sum. He doesn't have any money. They wouldn't even agree to stop the levy long enough to let him pay the CPA to prepare his tax returns. The CPA wouldn't do the work without getting paid up front. (Can't say I blame him). The only thing that was going to stop the levy was a big wad of cash or a bk petition. So we had no alternative but to file the 13 to free up his wages so he could pay the CPA to even figure out what we're dealing with here. He wants to pay them; he makes good money and has the ability to do so if they'll just stop the penalties and interest -- which the bankruptcy petition does for now. But if they cause his plan to fail confirmation by insisting on being paid in full during the 5year plan, he'll have little choice but to try to go "off the grid", so to speak, and I'm afraid that may put him in jail. It's like they're looking for an excuse. As if all this weren't bad enough, his wife is 8 months pregnant so she can't work and she is pulling her hair out about this. This kind of stress is no good for anyone -- much less a pregnant woman.

How much tax are we talking about?

We don't know how much yet exactly because the CPA won't finish until he gets paid. Extrapolating from what little we do know, I'm ball-parking it in the neighborhood of 50K to 75K including all the penalties and interest.

You might think about a chapter 11, if push comes to shove, there is no limit on the length of a chapter 11, but if the guy is barely making it, I doubt he can afford the administrative upkeep of a chapter 11.

That is something I'm considering if the IRS won't let his plan be confirmed. I think he could afford it. He's doing good financially -- or would be if the feds weren't taking his whole paycheck. Chapter 11 will cost him a lot more -- money that could be going to the IRS to reduce his tax debt. I don't blame them really for not being sympathetic and I don't expect them to cut him a lot of slack. I just wish they would stop putting roadblocks in his path of trying to settle up with them.

Thank you all for your input.

[justcurious]

Wow, what a case.

Does he own a home with equity? I'm not a fan of using equity or a second mortgate to pay off debt but this may be a valid exception. Is it possible for him to get a loan using the house as collateral and pay off the tax lien in a lump sum?

[BigJohn]

As a family of 5, did he think he was making so little money each year that he thought he didn't have to file?

[MSbklawyer]

Wow, what a case.

Does he own a home with equity? I'm not a fan of using equity or a second mortgate to pay off debt but this may be a valid exception. Is it possible for him to get a loan using the house as collateral and pay off the tax lien in a lump sum?

Nope, no home equity. And even if he did have any I'm sure the IRS would have levied on it by now. All he has is an income stream and he doesn't even have that anymore.

[MSbklawyer]

As a family of 5, did he think he was making so little money each year that he thought he didn't have to file?

No, he makes good money. I don't know what his reasons were -- don't want to know. My guess is that he probably got behind with the IRS one year and couldn't pay and rather than facing it, just quit filing.

[lrprn]

Your client is in one tough place, that's for sure

You've already gotten some great suggestions, msbk, and you may have done this already too. However, since you didn't mention it, in addition to the payment plan options you already have in place for your client with the IRS, since the tax debt owed is likely more than $75,000, a fair number of tax experts recommend a consultation with a tax attorney who specializes in high-tax cases like this one.

Was one of your lawyer colleagues you've been talking with one of these high-tax specialty lawyers?

I can't say whether these sites are reliable or not (and with your insider status, you certainly don't have to settle for doing online searches like we mere mortals ), but here are two online resources that can help unearth a high-debt tax attorney in Mississippi:

http://www.mississippitaxattorney.com/

http://www.mslawyer.com/attorneys/taxlaw.html

Hope you'll keep us posted on how you and your client do on this difficult journey.

[MSbklawyer]

Your client is in one tough place, that's for sure.

Was one of your lawyer colleagues you've been talking with one of these high-tax specialty lawyers?

No doubt about it. It doesn't pay to get crossways with the IRS. They have definitely got a tight grip on his gonads.

I have consulted informally with a tax lawyer that I know about the situation. He tells me that he doesn't think he would be able to be much help since there really aren't any tax issues, at least at this point, about whether or not the guy owes the taxes. The client clearly owes it. So far the IRS hasn't had any qualms about the CPA's figures for the tax years he has completed. He did offer to help me reach the right people in getting the IRS to let him pay less than the full amount through the plan, with the balance surviving the discharge.

We're going to put all our cards on the table for the IRS to see. If it's really money that they want then we can get them paid given sufficient time. My hope is that they are just trying scare this guy straight so that he'll never do this again and will let him get straight and not force him into poverty.

[justcurious]

Hope you'll keep us posted on how you and your client do on this difficult journey.

I agree, this is a fascinating case. Please keep us updated on how things work out!

[rrockinggramma]

perhaps Tim Geitner (sp?) can give him some tips on how to get around his tax debt. Or Charlie Wrangle. But I do wish you the very best in figuing this one out. Good Luck!!!!!

[HHM]

Yeah, but with the OIC, they want a lump sum. He doesn't have any money.

Well, that is sort of the point of an Offer in Compromise. Actuaully, you can pay an offer over 5 months or 24 months. Regardless of his ability to pay (reasonable collection potential), the IRS would probably deny the OIC on policy grounds anyway, but if he can't pay it in a 13, and if the IRS won't accept an installment agreement, all you have left is an offer. And you are right, with 10 years of unfiled returns, etc, he is on the border of being submitted to CID (criminal investigation division).

Once the BK is dismissed, it will actually take some time for the tax to go back into collections, and if some returns have been filed, the IRS usually takes 4-8 weeks to process old returns.

As for the IRS being able to take 100% of pay through a wage garnishment, that doesn't sound right, I am not aware of any law that allows that. IRS is subject to federal garnishment guidelines. The only power they have beyond that is they can garnish social security.

[MSbklawyer]

Well, that is sort of the point of an Offer in Compromise. Actuaully, you can pay an offer over 5 months or 24 months. Regardless of his ability to pay (reasonable collection potential), the IRS would probably deny the OIC on policy grounds anyway, but if he can't pay it in a 13, and if the IRS won't accept an installment agreement, all you have left is an offer. And you are right, with 10 years of unfiled returns, etc, he is on the border of being submitted to CID (criminal investigation division).

We are going to try an offer in compromise once we have a good handle on how much he owes. The problem is, he makes decent money. So the collection potential is there. The IRS uses the same numbers as the bankruptcy means test to determine the collection potential. Actually, it's the other way around, the BAPCPA adopts the IRS's numbers.

To make matters even more complicated, for several years of the time in question he had his own business that employed several people. Since he didn't file a return, the IRS simply figures his tax based on his gross receipts. No deductions for his payroll or business expenses; no exemptions for his dependents, nothing. Just gross receipts multiplied by the tax rate. He had a construction related business, so his gross receipts are huge -- hundreds and hundreds and hundreds of thousands of dollars. His profit, of course, would have been a substantially smaller number and is what his taxes would have been based on had he filed a return. That's why we so urgently need the CPA to get the returns for those years done.

Once the BK is dismissed, it will actually take some time for the tax to go back into collections, and if some returns have been filed, the IRS usually takes 4-8 weeks to process old returns.

Hopefully it won't come to that. Hopefully we can hold the 13 together, or an offer in compromise or, failing that, converting to a chapter 11.

As for the IRS being able to take 100% of pay through a wage garnishment, that doesn't sound right, I am not aware of any law that allows that. IRS is subject to federal garnishment guidelines. The only power they have beyond that is they can garnish social security.

Take a look at the Consumer Credit Protection Act 15 U.S.C. 1673.

http://uscode.law.cornell.edu/uscode/html/uscode15/usc_sec_15_00001673----000-.html

This is the law that subjects those mere mortal debt collectors to the 25% garnishment ceiling. By its own terms, in section (b)(1)(C), it does not apply to debts owed for "any State or Federal tax".

C) any debt due for any State or Federal tax.

only one doing all this legal work for next to nothing.