Chapter 7 & IRS Question

[Louis]

Hello,

We filed for Chapter 7 in October of 2005 ( just before the changes in the law ) and were granted a discharge in February of 2006

Earlier this year I received an audit notice of my 2004 and eventually 2005 tax returns from the IRS and after two meetings and also sending quite a bit of paperwok back and forth, I am awaiting the report.

My question to any legal eagles here is that we had a lot of medical deductions those two years due to some family sicknesss. I was able to justify the deductions with records from doctors/pharmacies, receipts and cancelled checks. Since the beginng of this the IRS has said that since we filed for bankruptcy, we may not be able to claim the 2004 and 2005 deductions considering they were discharged in the BK.

So, the main focus of my question here is: Has anyone ever heard of this ?

I told them that if they disallow the deductions, we would go to tax court to dispute it and basically they seem to be on the fence about it. They have even asked me to sign a form that will allow them to extend the investigation so the statute of lmitations will not run out, but so far I have refused.

Thanks !

[Bandit]

First, I am not the legal eagle here but the medical/tax exemption is important to me.
I wonder if very many people even know they can make medical deductions on taxes. I would like to know because I will have plenty of reciepts showing how much I paid out of pocket that will not be considered a discharge as in a medical debt, but that I actually paid.

Maybe no one here has ever heard of that but nevertheless it is a great and valid question.
Louis, Do you think if you can show the amounts that you paid out of pocket before the discharge, (which sounds like you are doing) then that portion, or part of that could still be included as exempt?
I can kind of see the point that the IRS has if the medical bills were discharged but I also see your point if you actually paid a lot of them before the discharge.

(The IRS may not even know that answer & could be one reason they are riding the fence)

I know in the FAQ section they say to consult attorneys for certain tax questions during the BK. Yours is a little more complicated post BK but nothing a good attorney can't figure out. I hope to learn more about this and what happens as it may help me in filing my taxes and I may be able to use some medical exemptions in the upcoming year.

[Bandit]

They have even asked me to sign a form that will allow them to extend the investigation so the statute of lmitations will not run out, but so far I have refused.

Good for you. I would not sign that thing either.

[Louis]

Good for you. I would not sign that thing either.

I have been very cooperative with them for the last seven months when this all started, but my feelings as of now are that whatever the outcome will be, it will not be any better if I give them several more months to think about it.

Also, if they do say I owe anything from that time period, I am automatically going to file a motion for the local tax court to hear the case.


In addition to this, I think I was not clear in my first post. The medical bills were paid by me, mainly with credit cards or personal checks, so no medical bills per se were discharged, just a large amount of credit card debt of which some was used to pay the bills. So they are basically "thinking" that since I filed BK in October 2005, I may not be able to claim the medical deductions on my 2004 return ( of which there were quite a large amount ) which I feel is totally wrong.

[B12]

This is so very complicated. I have always done my own accounting statements and very complicated tax returns.

I would not touch my taxes after BK with a ten foot pole!

From my understanding, when the trustee takes over, it creates an estate and that estate and you are separate entities. I am still trying to figure out about deductions that were charged on cc's and the cc debt being dismissed in BK.

So messy, it hurts my brain. I am going straight to the accountant with my taxes after the BK.

From my little understanding of it, any deduction that was paid outside of a cc or loan that is bankrupted, is deductible. I am still trying to research deductions that were on the cc and that cc debt dismissed.

Then, different state laws and which chapter come into play.

Leave it to the government to make things messier. I am in a
total state of confusion regarding taxes.

[familyof7]

I have been very cooperative with them for the last seven months when this all started, but my feelings as of now are that whatever the outcome will be, it will not be any better if I give them several more months to think about it.

Also, if they do say I owe anything from that time period, I am automatically going to file a motion for the local tax court to hear the case.


In addition to this, I think I was not clear in my first post. The medical bills were paid by me, mainly with credit cards or personal checks, so no medical bills per se were discharged, just a large amount of credit card debt of which some was used to pay the bills. So they are basically "thinking" that since I filed BK in October 2005, I may not be able to claim the medical deductions on my 2004 return ( of which there were quite a large amount ) which I feel is totally wrong.

Did You give them receipts from the one that were paid (even with credit cards)?

[Louis]

Did You give them receipts from the one that were paid (even with credit cards)?

Yes ... Gave them dozens of receipts, pharmacy/doctor computer records, etc. After all that, they then asked for the cancelled checks and credit card statements showing the medical charges. We had just about everything they wanted although we could not locate about 10% of the cancelled checks, but I told them that there is overwhelming proof of all the charges and payments, so time will tell.

I am convinced at this point they will challenge some of it, so we shall see.

[CindyLou]

are they only challenging the bills that were paid by credit cards? are they going to allow the ones that were paid by check? if so I guess that kinda has some logic to it. I guess they are saying that in essence you didn't really "pay" for it. But then again how can they really prove that. Lets say you have a card with a $1000 limit. You charged $100 a month in groceries and $100 a month in prescriptions until you hit the 1000 limit and you were paying the minimum payment until you filed. How can they now how much went toward the grocery payment and how much went toward the prescriptions. I can see both sides. I would certainly fight it to the end!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! Good luck!

I went through an audit in 2000 and was successful. Just curious are they wanting to see actual receipts or are they take either statements or receipts or canceled checks? How detailed are they getting with you on stuff?

[Louis]

I went through an audit in 2000 and was successful. Just curious are they wanting to see actual receipts or are they take either statements or receipts or canceled checks? How detailed are they getting with you on stuff?

Very detailed .. First they wanted the receipts which I gave them along with pharmacy & doctor computer records of the charges, then they asked for actual bank and credit card statement copies showing where the charges/payments cleared, then they logged all of the deposits from the bank statements I sent them and asked me to "substancially" show if any of the deposits were not income because they would consider them so unless proven otherwise. I had to prove things such as a reimbursement check from the insurance company or a large check for a used auto I sold were not income by obtaining copies of the deposits.

Understand, I have not been given any conclusions on all of this yet and now after seven months they want me to sign a form that extends the statute of limitations until December of 2008, but as I stated earlier, I see no reason to prolong this.

[CATCHMEIFYOUCAN]

Gosh, this hurts my brain thinking about this too. Imagine if I got an audit because I'm a gambler. Unlike you with a bunch of medical bills you paid off through your credit cards, than filing later down the road to Bk. I'm wondering IF I were to get audited, would they consider the gambling debt I wrote off is no longer permissable because I filed Bk (most of my gambline came from credit cards) ! ! ! ? ? ? Check out www.lawyers.com and scroll down to the tax section where you can ask your question, you might be able to find somewhat of a good answer!

This is really scary to think of ! I thought IRS and BK are separate entities, they should really have nothing to do with each other, UNLESS your trying to bankrupt on old taxes.

Hmmm, Best of Luck to you, Catchmeifyoucan !

[B12]

I hear you.

My business expenses that are charged on cc's have been written off my taxes for 4 years.

I have an appt. with accountant next week. I am going to ask him to explain it to me and will let you know. This is really bothering me.

[Louis]

It has been an escalating event for us. First the IRS sent me a letter saying they were going to audit my 2004 taxes to verify my deductions of which there were a large amount of medical bills, insurance preimius, etc. I said ok, whatever.. they are all legit.

Then after the first visit by the auditor, they realaized that I had spent more money than I claimed as income, ie credit card charges, etc. They asked me, how did you come to spend more money than you are showing as income ? I said well, a large portion of the expenses were charged on credit cards.

Then they said, can you show us the current balances so we can verify this information. I said no because the next year I filed BK and all of them were wriiten off, although I was able to show them copies of the creditors and amounts that were discharged. This is when they decided to also audit my 2005 returns and remark that if you filed BK, we are not sure you can use those deductions. I said according to the BK rules I read it was ok to do this.

As I stated earlier, now I receive a letter asking me to sign a form 872 to extend the statute of limitations that runs out next April 15 to the end of next year to give them more time. Basically, I do not want to do this and simpy want them to make a decision and if I disagree, we will go to tax court.

So, this is where we are

[Louis]

This is really scary to think of ! I thought IRS and BK are separate entities, they should really have nothing to do with each other, UNLESS your trying to bankrupt on old taxes.

Although I realize the IRS can "try" and do whatever they want, I really do not think ( and this is confirmed by there confusion ) that they can disallow my medical deductions because I filed BK.
If it turns out they do disallow them, I will definately challenge it and I made that clear to them as well by asking them to show me where in the IRS guides it says I am wrong.

So far , there response is: we are not sure

[Granny]

Did you take a deduction for medical expenses that were paid by credit card, that you later had discharged?

My best guess is that any deduction for a discharged payment would not be deductible but those paid by debit card and check would be. Is that what is happening?

[Louis]

Did you take a deduction for medical expenses that were paid by credit card, that you later had discharged?

My best guess is that any deduction for a discharged payment would not be deductible but those paid by debit card and check would be. Is that what is happening?

About half and half .. some were credit card charges, some were paid by check, but it is also the time line that I am disputing with them.

This audit is for 2004 taxes, we filed BK in October 2005 and were discharged in Feb 2006.