Getting Rid of Back Taxes in Bankruptcy and What You Should Know
Bankruptcy can help you eliminate back income taxes depending on your situation and qualifications. You can file Chapter 7 bankruptcy to discharge tax debt that qualifies under the bankruptcy code. If your debt does not meet these qualifications, you may consider Chapter 13 bankruptcy to help you repay what you owe based on your income ability.
While it is important to review your situation with a qualified tax professional or bankruptcy attorney to learn how you may qualify, the following points are few things you should know about eliminating back taxes in bankruptcy:
- To discharge tax debt in Chapter 7 the debt should have been due three years prior to filing. This includes extensions you may have received during this time.
- Prior to filing your returns should be filed, even past due taxes roughly two years before bankruptcy.
- The Internal Revenue Service (IRS) must assess the debt at least 240 days before you file your case. The 240-day period may vary depending on any events that may have occurred during the time period.
- Tax returns may not be considered fraudulent; information provided should be true. Tax evasion should not have been attempted.
- Even if tax debt meets requirements under the bankruptcy code it will not be discharged unless back taxes have been filed. A substitute return, sometimes completed by the IRS when the taxpayer does not submit a recent
return, does not count.
You can review your tax debt with an expert to review your options, including Chapter 13 bankruptcy which helps reorganize debt obligations based on your ability to make monthly payments.
Unpaid Taxes: Understanding the IRS Collection Process
Failing to file an income tax return or filing but failing to pay what is due may prompt the Internal Revenue Service (IRS) to begin the collection process. A tax bill, CP-14, is sent to a taxpayer which begins the process. The IRS has been known to increase their collection efforts soon after the bill is sent. They will continue efforts until the tax debt is paid in full.
The bill sent to taxpayers who owe will provide information regarding the amount due and penalties and interest accrued. There may be several other notices to follow if payment isn’t received after the initial notice was sent to you. The notices also provide information on where payments can be sent. If you’re not able to pay off what you owe in full, you should make an attempt to submit smaller payments.
Failing to pay after several notices have been sent will make collection actions more aggressive. A notice will be sent regarding further collection set to be taken against you.
There are 3 main collection methods the IRS may look to enforce:
- Tax lien against personal property.
- Tax levy that may have personal property seized.
- Refund offset.
In many cases, the IRS will look to place a levy on a bank account or wages; also known as IRS wage garnishment . If you are owed a refund, they may look to subtract what you owe from it. It is also possible for your entire refund to go toward the liability amount owed.
Why is Important to File a Federal Income Tax Return Even if it is Late?
If you voluntarily file back income taxes the consequences for filing late fail in comparison to having the Internal Revenue Service (IRS) pursue you for outstanding taxes. The longer you wait to file unfiled taxes it’s likely you’ll pay more in penalties and interests. This reason alone should be enough for taxpayers who haven’t filed previous returns to get them submitted but unfiled returns for a lengthy period of time could lead to extensive tax debt .
If you owe taxes, penalties and interest will continue to accrue until the amount is paid off or paid in full. There is a possibility the IRS may file a return for you; also known as a substitute return. When the IRS completes a substitute income tax return, they often don’t include credits or deductions that may lower your amount or increase your refund if you are due for one.
If a substitute return is completed, they may begin collecting outstanding taxes due based on this return. They may look to place a lien or levy against personal property. If they complete a return you still have an opportunity to complete unfiled returns with deductions and credits applied. If you voluntarily file, you may be eligible for a payment plan to resolve your debt and possibly settle for less than what is owed.
If the IRS catches up with you about unfiled or unpaid taxes, depending on the amount owed and how long you continue to fail in filing or submission of payment, it could be considered tax evasion, lead to a hefty fines or even prison time. Review questions or concerns with a tax attorney or tax expert.
Late Income Tax Filers Beware Of Unscrupulous Preparers
You may be tempted to rush around to any tax preparer to file at the last minute or even a few days late, but beware of unscrupulous tax preparers who may file false information on your return.
An article in the Dallas Morning News, offers a story that should serve as a warning when choosing your tax preparer.
The article said:
Joyce Marie Simmons went from running a Snow Cone stand to becoming the tax-refund queen of Polytechnic Heights, acquiring a newly built strip center valued at $860,000 and driving a $78,000 BMW 760 Li.
Before the April 15 tax filing deadline in past years, local business owners watched wide-eyed as last-minute filers spilled out the door of Simmons’ Diamond Tax and Notary Service at 2812 Miller Ave., circling the building. Meanwhile, the customer flow was lax at three rival tax-preparation offices nearby. The secret of Simmons’ success?
From 2003 through 2005, federal authorities say, her clients received windfalls from deductions and tax credits by claiming that they operated enterprises they didn’t own and running up phony business expenses. They declared themselves the parents or guardians of bogus dependent children that inflated their exemptions, and Simmons, the government says, supplied the names, at times buying them from homeless people along with Social Security numbers.
Okay, there are a few things to note here, 1) there were lots of last-minute filers falling victim to this tax scammer. When you wait to the last minute you can become more vulnerable to tax scams so keep extra alert. Number 2) most of these taxpayers were probably surprised with their “windfalls” especially if they owed money in past years.
If you received a huge windfall when you were expecting to pay out to Uncle Sam, expect foul play and get a second opinion. Number 3) tax preparers in Texas ARE NOT required to undergo licensing or certification, a matter of fact they don’t even need to register with state or federal tax agencies. That means there is little oversight and regulation on “kitchen counter” tax preparers, so if you can afford it you may want to work with a tax accountant.
Two Sources For Free Tax Assistance
Are you delaying filing your taxes because of a lack of money?
Resources you can use to file your taxes for free:
- AARP Tax-Aide – Despite what the name may suggest, this program is not just for senior citizens. AARP Tax-Aide is available for all taxpayers of all ages and income levels. Local volunteers who are trained in tax preparation and certified by the IRS will file your taxes for free. Call 888-227-7669 to find locations and make an appointment. Or, you can visit here and submit a tax question online.
- VITA – VITA is a tax preparation service that helps families earning $49,000 a year or less and military servicemembers file their taxes. This tax service is free and available in both English and Spanish. No appointment is necessary; but you can call 800-829-1040 or a 211 operator to find locations and times the tax service is available.
And of course you can always go to www.irs.gov and file your taxes using their online system or one of their printable forms. The IRS website includes a ton of free and useful information for filing your taxes. Remember, if you file your tax return electronically and use automatic deposit, your tax refund could be deposited into your account in as little as 10 days.
So if you are tempted to take out a tax refund loan, just remember that you could get your refund in as little as 2 weeks without the loan. Also, if you owe taxes and are unable to pay, you can still file your taxes now, as long as your pay by April 15, 2010 you can avoid a penalty. You can also request an extension for filing or paying your taxes.
Common Questions about Unfiled Income Tax Returns
Back income taxes result from not filing a return. While it’s best to file on time each year, you’re better off filing a return late than not at all. Dealing with income taxes is something many taxpayers try to avoid but ignoring your liability can make the situation more challenging. The Internal Revenue Service (IRS) has various options to help those settle tax debt from back taxes and it’s fairly common for those who owe to have questions about how to proceed.
The following questions may help you get started in getting your liability resolved:
What happens if I forget to file a federal income tax return?
It’s important to still file a return for the tax year in question. Filing may help you avoid serious trouble with the IRS.
The Internal Revenue Service (IRS) often imposes stiff penalties for unfiled returns. Many taxpayers don’t realize that the IRS has ways of learning about income and other financial information when taxpayers fail to file. Most often, a federal income tax return won’t be filed if a taxpayer cannot afford to pay the liability. Since the IRS has solutions for those who are able and unable to pay, serious consequences may result if you fail to file.
If you owe income tax you may end up paying additional penalty fees and interest. Even if you are unable to pay what is owed, the IRS has several options and is willing to work with you to resolve tax debt . In some cases, IRS wage garnishment may be enforced but many claim the IRS rather work with you to determine a solution verses garnishing wages.
If you purposely fail to file and owe quite a bit in taxes, it may be seen as tax evasion in which the IRS imposes hefty fines and even prison time.
While going to jail is often rare, it is possible. Most common consequences for unfiled or back income taxes include:
- Failure to file penalty that may accrue interest fees. The longer you wait to file, the more you will owe.
- Losing a tax refund you were eligible for. If you are due to obtain a refund, you may not be penalized for filing late but you have three years to submit a completed return that shows you are entitled to receive it.
- Statute of limitations is affected. You have 3 years to claim a refund and after that, the IRS isn’t obligated to issue one. Collection of back taxes start when a return is filed.
How do I determine how much is owed?
Filing back returns will help you in understanding your liability. There are other options to discuss with a tax expert to help you determine how much you owe.
What happens if I can’t pay what I owe?
The IRS has multiple options available that will allow you to make payments on your liability.
Is it possible to settle my taxes for less than what is owed?
Qualifying taxpayers may be able to settle with the IRS through different options such as penalty abatement and offer in compromise to settle at a reduced amount.
I received a notice for intent to levy from the IRS. What should I do?
When no attempt is made on your part to pay taxes, the IRS will at placing a levy on your wages or bank account. Contact the IRS and learn about options available to keep the levy from proceeding.
Should I handle back taxes on my own or with a professional?
This is a personal choice but even if you decide to file back taxes on your own, a tax attorney or tax expert can answer questions or concerns about your situation.
Tax Tips and Tricks for Homeowners
When it comes tax time, knowing what is rightfully yours to claim is crucial. That is why it is important to know tax essentials before tax time comes around instead of during. Since there are all sorts of rules that apply to different areas, such as if you have children, if you own a home, and so on, you need to know what applies to your situation. If you do own a home and you want to get the most reductions out of it, here are some of those essential tips and tricks you’re going to need to know.
Itemize Return to Claim Deduction
Unfortunately, about 40% of homeowners will miss out on a major tax advantage when they fail to itemize their income taxes. If you have a home and somewhat of a simple return, it can be tempting to take just the standard deduction but, it could be that your homeowners deductions are more beneficial to you.
The Home Office Deduction
The average home office deduction is about $3,500 according to the Small Business Administration. If you take that number and then multiply that by your tax deduction bracket that is how much you may be able to save. Don’t forget to take advantage of your home office and deduct the appropriate taxes.
If you happened to have purchased or refinanced your home in the last year, don’t forget about those expensive closing costs. On your return you can also include those fees and discount points that were paid when you closed or refinanced. Actually, even if the seller paid your closing costs, it is still tax deductible.
It is also important to note that the IRS is not currently charging for taxes for the Cancellation of Debt Income through a short sale, loan modification, or foreclosure . Unless this changes, which is under the Mortgage Debt Forgiveness Relief Act of 2007, this is important to keep in mind come tax time.
Why You Shouldn’t Pay Your Taxes With A Credit Card
Federal and state tax authorities encourage taxpayers to pay their taxes with credit cards; but doing so may not be in the best interest of the debtor.
The interest rates on credit cards are typically higher than the interest charged by the state or tax authorities. Once you charge your taxes to a credit card, unless you plan to repay the debt immediately, you could incur charges that are eventually equal to or even exceeds the amount of your original tax debt .
Believe it or not, the federal and state tax authorities are more flexible than credit card lenders. If you need more time to repay your taxes, both state tax authorities and the IRS are often willing to setup payment arrangements. Oftentimes you can repay your taxes over a period of two to three years if needed. Credit card companies will also allow you to repay the debt overtime but not without a high cost attached.
Tax authorities are able to place your account in uncollectable status if you are unable to pay due to illness, job loss or other issues. What that means is that they will freeze all collection activity until you are able to repay the amount. They will usually give you at least 6 months before they check in with you to find out if your financial situation has improved.
If you file Chapter 7 bankruptcy at a later date, you may not be able to discharge the credit card amount comprised of the taxes if those taxes would not have otherwise been dischargeable in bankruptcy. Please check with your bankruptcy attorney to discuss your particular circumstances.
- You will end up paying more. Yes paying your taxes late will result in interest and penalty fees; but that won’t be nearly as much as the interest you will pay on a credit card. Compared to credit card interest rates, the interest rates for both state and federal taxes are miniscule.
- You have more payment options with the taxing authorities. While the IRS and other taxing authorities will try to convince you to pay your taxes with a credit card, don’t be pressured into taking on new credit card debt. You are not required to take on credit card debt to pay taxes even if you have the credit available. Take advantage of the numerous payment arrangements available through the IRS and other tax authorities.
- If you decide to file bankruptcy after paying for your taxes with a credit card, you may not be able to discharge that portion of the credit card debt in bankruptcy. The bankruptcy code prohibits the discharge of debts incurred to pay taxes if those taxes would not have otherwise been wiped out. In other words, if you charged your taxes to a credit card this year and filed for bankruptcy a year later, you would not be able to discharge that debt in Chapter 7 bankruptcy.
Three Tax Myths That Could Land You In Trouble With The IRS
Around tax time a lot of myths get thrown about online and offline. If you want to stay out of trouble with the IRS and get your tax situation done correctly take a look at some of the most common but nonetheless untrue tax myths out there:
- Money earned online is tax-free. Whether you earn money online or offline, all revenue is taxable by the IRS and must be reported to the IRS on your income tax filing. One of the biggest victims of this tax myth are entrepreneurs who finding more of their business online than before. Do yourself a favor and take the time to carefully document and report all revenue earned online and offline to the IRS at tax time.
- If you barter, you don’t have to pay taxes. While it is true that no money changes hands during a barter exchange, the value of the barter is taxable by the IRS for both sides. For example, if you bartered services valued at $100 with someone who was giving you services also worth $100, you both would need to pay taxes on the $100 worth of value you received.
- Under-age workers don’t have to pay taxes. All singles under age 65 with $9,350 in gross income in 2009 must file a return, as well as those 65 and older with income of $10,750 or more. Self-employed individuals with incomes of $400 or more regardless of their age must also file a tax return.
I Received A 1099 For My Forgiven Debt…Do I Have To Pay Taxes?
If you receive a 1099 for canceled or forgiven debt, you may be required to pay taxes on that debt.
Here’s what you need to know:
- If your credit card company wrote off your debt because it was uncollectible after a certain amount of time, you may be required to pay taxes on the debt.
- If your home was sold in foreclosure but had a deficit balance on the mortgage which was forgiven by the mortgage company you may need to pay taxes to the IRS on the forgiven portion of that debt.
- The same rule could apply for other types of debts which are written off and reported to the IRS. Any portion of the debt that was forgiven is taxable under the current tax laws. The IRS requires that all banks and financial institutions report any canceled or forgiven debt to them because they consider it income.
- If your debts were forgiven in Chapter 7 bankruptcy or Chapter 13 bankruptcy , you DO NOT need to pay taxes to the IRS on the forgiven debt. Debts canceled or forgiven in bankruptcy are not taxable. However, sometimes a creditor will still issue a 1099 for a canceled debt. If you receive a 1099 for a debt that was discharged in you bankruptcy, you need to fill out the IRS Form 982. The form is complicated but an experienced tax accountant can fill it out for you and make sure that you are not taxed on debt which was discharged in bankruptcy.