IRS Debt and BK

[spearmint]

I owe money to the IRS - quite a lot. The debt was incurred by taking out a 401K after leaving a nasty relationship in which I partly owned the home I lived in and then lived in a hotel for three months. I had to buy a home to live in. It was a hardship withdrawal.

I also need to file BK, either 7 or 13 although attorney is leaning towards a 13. He is considering including the IRS debt in the BK so I can pay it back over 3 or 5 years.

My question is . . . I thought that when you filed BK you could not include tax debt unless it was over three years old and the returns had already been filed. This particular debt is 10 years old and the return for that year was not filed (long story - as it always is). I am surprised he is considering including it in the BK.

I worked with an accountant three years ago who was working with the IRS to set up a payment schedule to pay it back but it all went up in the air when I lost my job and could pay neither the accountant or the IRS. Since then I have had only temp jobs and only recently got a contract job. This is brings me to the present.

Is it wise to include IRS debt in a 13? I didn't even know it was possible.

I am also concerned that my payments will be SO high I won't be able to afford to live. Any guidance on that, too? I don't make that much money. It sounds a like debtors prison to me.

Also, should I consult with a tax attorney, too?

[HHM]

If the return is not filed, it will not be "discharged" in BK.

What your attorney is contemplating is using chapter 13 BK to force the IRS into a payment plan that you can afford. Note, the "penalty" portion of the tax debt will be dischargeable.

You don't have any choice to "include" it, ALL debts must be accounted for in bankruptcy, you cannot pick and choose which debts get "included". Included is such a misused word in the context of BK. ALL debts are listed and therefore "included", the question is really, what happens to the debt? Does the debt get discharged?

Since the tax debt will not be dischargeable, you have a couple options
1. File chapter 13 and pay the debt through the chapter 13. That is the most efficient and cost effective option assuming you can afford the required payment. Basically, just take your tax debt, divide it by 60, add about 20%, that is roughly what your "minimum" chapter 13 payment would be.
2. Assuming you will qualify, file for chapter 7 bankruptcy, and wipe out all your other debts. As stated, since the tax return was never filed, the tax debt will not be dischargeable, but given the age, the penalties will be.
2(a). Then work out something with the IRS directly after your chapter 7, e.g. an offer in compromise (you mentioned not making very much money, so that may be an option) or payment plan.

Not really sure what help a tax attorney would be at this point. You have no defense to the underlying liability, the only major mistake was that the return was never filed. I would suggest figuring out a way to file the original return (that can sometimes reduce the amount owed).

[spearmint]

If the return is not filed, it will not be "discharged" in BK.

What your attorney is contemplating is using chapter 13 BK to force the IRS into a payment plan that you can afford. Note, the "penalty" portion of the tax debt will be dischargeable.

You don't have any choice to "include" it, ALL debts must be accounted for in bankruptcy, you cannot pick and choose which debts get "included". Included is such a misused word in the context of BK. ALL debts are listed and therefore "included", the question is really, what happens to the debt? Does the debt get discharged?

Since the tax debt will not be dischargeable, you have a couple options
1. File chapter 13 and pay the debt through the chapter 13. That is the most efficient and cost effective option assuming you can afford the required payment. Basically, just take your tax debt, divide it by 60, add about 20%, that is roughly what your "minimum" chapter 13 payment would be.
2. Assuming you will qualify, file for chapter 7 bankruptcy, and wipe out all your other debts. As stated, since the tax return was never filed, the tax debt will not be dischargeable, but given the age, the penalties will be.
2(a). Then work out something with the IRS directly after your chapter 7, e.g. an offer in compromise (you mentioned not making very much money, so that may be an option) or payment plan.

Not really sure what help a tax attorney would be at this point. You have no defense to the underlying liability, the only major mistake was that the return was never filed. I would suggest figuring out a way to file the original return (that can sometimes reduce the amount owed).

Yes, I can certainly try to file it - if the accountant will give me back my paperwork. He has all my tax backup info.

If possible, I'd prefer the Chapter 7 and pay the IRS afterwards, hopefully for two years and then get an Offer in Compromise; however, the attorney I spoke with told me that OIPs are very difficult to get these days. The IRS is just not doing them. This is in complete contrast, of course, to what the accountant told me three years ago.

Does anyone have any personal experience of recent OIPs with the IRS and what they are doing now?

Another point that confuses me, though, is that I thought that tax debt had to wait until after a BK to be paid back. I didn't know they could be part of a BK at all.

What bothers me about a Chapter 13 is that there is no incentive to earn more money or start a business because they take any additional income you might make. It seems I might as well crawl away in a corner for five years and not live at all during that time or try to improve my life.

When I retire I'd like to go back home to my own country but I would be drawing USA social security. I wanted to go back in the next year but the attorney told me the IRS would take every penny of my SS. This means I cannot return because I need the SS to survive.

I would have a small company pension and he told me they couldn't touch that part of my income. Now, though, I think I will wait until I retire at 65 to take it - six years from now.

I've been wanting to start a small film production business but it seems I won't be able to do that because if I make money from it - even a small amount - they will take that, too.

Would there be any point in starting an IRA and putting as much as I can into it? I don't believe BK can touch those funds but I'm not sure. I'm just trying to find a reasonable way to repay the debt AND to continue my life as well.

[HHM]

The attorney is correct, OIC's are still very difficult to get. The IRS introduced new OIC rules, but it really only applies to those in true poverty (so it is of limited use). I don't have recent numbers, but the going consensus seems to be that the IRS only accepts about 10% of submitted OIC's. So you cannot count on an OIC as the resolution. Also, they are costly if you get someone who actually knows what they are doing. I would NEVER use someone who primarily prepares tax returns to do your Offer. Tax returns and IRS collection are different universes. You should hire tax resolution specialists. But even simple OIC's can take upwards of 9-12 months to get approved and a reasonable cost is around $5k for relatively basic OIC's and can climb well north of $10K for high debt and complex issues.

Note, the IRS CAN touch the pension. That may be another reason the OIC is a non-starter.

Again, if you can, do the 13, it is the one option with the highest possibility of success and the most comprehensive solution. The only reason you wouldn't do the 13 is if you "really" cannot afford the payment.

[spearmint]

I wonder if I should at least meet with a tax resolution specialist - if I can find one. I am getting the feeling here that what my attorney told me is indeed the best way to go - a CH13. He asked me to call the IRS and get printouts of my tax status for the last 10 years before he actually decides if a 7 or 13 is the best way to go.

The trouble is, I don't know if I could live on what's left if they take a sizable payment. I only make $45K and it costs me $2400 a month just for living expenses - and that's before I change my car after which I would incur a car payment (lease payment) and increased insurance. Also, there are such things as rent increases every year - or most years.

And what happens if I drop out of a Ch13 because I can't afford to live on what's left. There seems to be no resolution that I can live with. If I had a higher salary it might be better but even then perhaps they would take a higher percentage.

This is one of the reasons I had hoped I could do a Ch7 to get rid of all the other debt and then work out a monthly payment plan with the IRS followed by an OIC - but perhaps my payment to the IRS would be lower in a Chapter 13.

And is it true that if you make a little extra money to survive by doing some freelance work that they will take that income, too?

I also have state taxes to pay back although not so much as to the IRS. Does the IRS take precedence over every other debt in a Ch13?

You said that the only reason not to do a 13 is if I can't afford the payments. If that turns out to be true, what are the alternatives to get this resolved? I have no savings, no assets, no jewelry - nothing. The bad job market made sure of that over the last 10 years.

I find this all so utterly overwhelming and worrying.

PS: One thing the attorney said might be possible is that the IRS got rid of my ten-year old debt in the tax amnesty they had a few years ago. I didn't even know there was one but is this possible?

[HHM]

The tax resolution industry is largely nationwide, so you don't really need someone local. There are firms and attorneys that can help that may not b located in your state. But given you are in CA, some of the best that I know of are located in CA (maybe not near you), but in the state. The main states with the representatives are CA, CO, and NY (and to some degree TX and IL). Outside of those states, most attorneys and resolution experts dabble.

[AngelinaCat]

Spearmint, you need to talk with someone who specializes in IRS problems. You also need to talk to someone with the IRS directly. ***NO do NOT get upset****, or go flitterring around like the *Tax resolutions specialists* you hear about in commercials would have you believe.

We owed a huge amount to the IRS through bad decisions, including liquidation of a 401K--don't even THINK of it--and selling a piece of property that we learned after the fact, was exempt.

We got a dunning letter in the mail indicating that the IRS would start drawing from our CU account, which included what monies 'Hub got from SS, his paltry pension, and what little I could bring in.

He got on the phone and talked with a very nice person, and set up a repayment plan that was reasonable and doable. We paid on this for almost a year. Then, when we filed CH7 BK, we got a letter, from IRS, forestalling our payment plan until after we were discharged.

Once we were discharged, we got another letter from the IRS saying that we needed to reinstate the above payment plan. 'Hub called again, and got it restarted. We have also had to call a couple of times since to get the amount we pay reduced, as we just do not have the income any more.

At each and every time 'Hub called, the person on the other end of the phone was very nice and cooperative.

This is far more friendly and cooperative from what the *tax resolution commercials* out there are scaring you into believing.

You cannot believe everything you see and read! Even here!

ETA: I in no way am referring to HHM's advice. My comment means that you should do your own 'due diligence' in research and information gathering. This forum is one source, but if in doubt consult an attorney.

[HHM]

How much tax are we talking about? If it's under $25k,you can probably resolve that on your own, over that amount, IRS rules change dramatically, much harsher than the means test, so representation is an advantage. IRS collection agents will take advantage of you if you let them.

[GoingDown]

So, just to be clear... if Spearmint had filed the tax return for that year and waited 3 years before filing bankruptcy, the tax would've been discharged in bankruptcy?

What if he files the tax return now and then waits 3 years and then files bankruptcy?

[Flamingo]

So, just to be clear... if Spearmint had filed the tax return for that year and waited 3 years before filing bankruptcy, the tax would've been discharged in bankruptcy?

What if he files the tax return now and then waits 3 years and then files bankruptcy?

You are getting into tax law here and a possible fraudulent situation. I believe the OP needs to talk to a good BK attorney along with speaking with a few other tax attorneys or tax specialists.

[HHM]

So, just to be clear... if Spearmint had filed the tax return for that year and waited 3 years before filing bankruptcy, the tax would've been discharged in bankruptcy?

What if he files the tax return now and then waits 3 years and then files bankruptcy?

Well, the issue is not "clear". On a technical point, it is 2 years at issue not 3 for the issue at hand. To discharge income tax debt, one of the rules is that the tax return must have been "filed" more than 2 years prior to the filing of BK. The 3 year rule is simply that the "due date" for the return must be more than 3 years prior to the filing of BK. Odds are, most in the OP's circumstances don't have 2 years to hold out. A substitute for return, which is what we have going on here (when the IRS files a return on behalf of the tax payer) does not count as a tax return for purposes of satisfying the 2 year rule.

But to answer the question, in general, yes. If the the OP were to file the original return now, and wait 2 years, the tax would arguably be dischargeable (assuming all other rules are satisfied). However, there has been some adverse case law recently on that issue regarding state income tax returns. Also, the IRS must "accept" the filed return which it doesn't need not. Usually the issue is moot because the debtor doesn't have 2 years to wait. But they should still file the return as doing so will usually result in a lower tax liability.

In another thread, I think JustBroke posted the IRS general counsel position paper on the issue, the IRS does take the position that a subsequently filed return by the tax payer is a filed return and therefore starts the 2 year clock running. However, with some of the newer cases, the IRS is taking more of a "let's see what happens" approach.

[AngelinaCat]

Things have changed then. When we filed in Dec. 28, 2007, we thought we would be able to discharge the 2004 taxes. Which would have been a great help. But we couldn't because instead of filing our return on April 15, 2005, our tax preparer filed for an extension and didn't file our return until November 15. So we were a few months shy of the full three years (or whatever the time period was at the time) requirement.

[HHM]

Things have changed then. When we filed in Dec. 28, 2007, we thought we would be able to discharge the 2004 taxes. Which would have been a great help. But we couldn't because instead of filing our return on April 15, 2005, our tax preparer filed for an extension and didn't file our return until November 15. So we were a few months shy of the full three years (or whatever the time period was at the time) requirement.

AC, you are confusing two separate rules.
(A) The 3 year rule...an income tax becomes dischargeable if the due date for the tax return is more than 3 years prior the BK filing date. Where you ran into trouble AC is that filing an extension "resets the due date" to the extension date. If you file an extension to file the return, the due date gets pushed out to Oct 15.
(B) The 2 year rule...an income tax becomes dischargeable if the tax return was filed, by the taxpayer, more than 2 years prior to the BK filing date.

[spearmint]

Well, the issue is not "clear". On a technical point, it is 2 years at issue not 3 for the issue at hand. To discharge income tax debt, one of the rules is that the tax return must have been "filed" more than 2 years prior to the filing of BK. The 3 year rule is simply that the "due date" for the return must be more than 3 years prior to the filing of BK. Odds are, most in the OP's circumstances don't have 2 years to hold out. A substitute for return, which is what we have going on here (when the IRS files a return on behalf of the tax payer) does not count as a tax return for purposes of satisfying the 2 year rule.

But to answer the question, in general, yes. If the the OP were to file the original return now, and wait 2 years, the tax would arguably be dischargeable (assuming all other rules are satisfied). However, there has been some adverse case law recently on that issue regarding state income tax returns. Also, the IRS must "accept" the filed return which it doesn't need not. Usually the issue is moot because the debtor doesn't have 2 years to wait. But they should still file the return as doing so will usually result in a lower tax liability.

In another thread, I think JustBroke posted the IRS general counsel position paper on the issue, the IRS does take the position that a subsequently filed return by the tax payer is a filed return and therefore starts the 2 year clock running. However, with some of the newer cases, the IRS is taking more of a "let's see what happens" approach.

Strange this issue should come up because I am thinking about filing that return from 10-12 years ago and waiting three years before filing (if I can hold off other creditors). Am I reading correctly, that I would only have to wait two years from the date of filing that return to file BK rather than three?

The thought I had about this issue is that if I file that old return now, it might increase efforts by the IRS to come after me now. I don't know how this works.

[HHM]

1. Theoretically, yes, you would need to only wait 2 years.
2. If the IRS filed a substitute for return, then there is already an amount assessed and a tax due, so I doubt there would be any new issues beyond whatever is happening now.