Chapter 7 & IRS Question

[Granny]

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.

The timing is right for an audit of 2004 taxes. It usually takes them almost 3 years before they get around to auditing.

You are wise to not allow the extra time for audit, but I seriously think you're gonna lose the deductions for the amounts that were charged to credit cards and then discharged in bk. They don't like it when you double dip, and that's what that amounts to.

[B12]

If that is the case granny, then every single person who filed BK after filing taxes with itemized deductions that were charged to credit cards would be affected.

Think about the ramifications. Medical and dental bills, small business owners, investors who charged materials to fix up properties, business travelling expenses not paid by the company, education courses, charitable contributions

food for the dependent grandchildren

This is scary, I am not waiting to see the accountant, I am calling him first thing in the morning!

[Granny]

If that is the case granny, then every single person who filed BK after filing taxes with itemized deductions that were charged to credit cards would be affected.

Think about the ramifications. Medical and dental bills, small business owners, investors who charged materials to fix up properties, business travelling expenses not paid by the company, education courses, charitable contributions

food for the dependent grandchildren

This is scary, I am not waiting to see the accountant, I am calling him first thing in the morning!

I've thought about the ramifications, I'm well aware of who all this could affect, and I know how the IRS works and I'm telling you this is how they are going to view it. Louis got caught in the audit trap. Doesn't mean everyone will, but the possibility exists.

There was something that triggered the audit, I doubt it was the bankruptcy, most likely it was the amount of medical deductions. The bk just happened to add fuel to the fire.

Let me know what your accountant says.

[Bandit]

If that is the case granny, then every single person who filed BK after filing taxes with itemized deductions that were charged to credit cards would be affected.

Think about the ramifications. Medical and dental bills, small business owners, investors who charged materials to fix up properties, business travelling expenses not paid by the company, education courses, charitable contributions

food for the dependent grandchildren

This is scary, I am not waiting to see the accountant, I am calling him first thing in the morning!

I think she means the portions, if any, of the medical bills that were on the charge cards being discharged and if those amounts were included as a tax deduction, not necessarily all the amounts that Louis payed out of his pocket.

I am going through the same exact thing right now, only I am on the other side prior to doing the taxes with medical exemptions. I have several charges with medical bills on them but I have all reciepts and will have many more, showing I have been paying the medical bills via the charge card.

Whatever would get discharged on the cards in BK, would not be exempt for taxes, but the portions I pay back prior to BK should be allowed to be exempt.
Don't you think?

This could get very screwed up if there are other charges besides the medical bills on the charge cards.

[Granny]

I think she means the portions, if any, of the medical bills that were on the charge cards being discharged and if those amounts were included as a tax deduction, not necessarily all the amounts that Louis payed out of his pocket./

Exactly, if he took deductions for expenses that he never actually paid, he is not entitled to the deduction.

I am going through the same exact thing right now, only I am on the other side prior to doing the taxes with medical exemptions. I have several charges with medical bills on them but I have all reciepts and will have many more, showing I have been paying the medical bills via the charge card.

Whatever would get discharged on the cards in BK, would not be exempt

deductible is the correct word here

for taxes, but the portions I pay back prior to BK should be allowed to be exempt.
Don't you think?

This could get very screwed up if there are other charges besides the medical bills on the charge cards.

Exactly. Keep in mind that in the eyes of the creditor and probably the IRS, any payments you make are to interest first and not to the principal balance and unless you use the card strictly for business, the interest is not a deductible expense.

[Bandit]

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.

This probably happens. If they would stop & think about how people are in the red. It would be easy for that to happen from just one little loan that someone uses to pay back another loan. It might 'appear' they spent more than they made. I mean really, they would end up taxing loans on everyone who takes out a loan to pay a loan and say the loan was income because you spent more than you made.

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.

they are questioning a reimbursement check from your insurance as income?
They have it misconstrued (they would like to tax those funds twice without realizing) because they are only looking at figures and not exactly how the figures were applied.
I feel you have the facts straight and the IRS has not put it all together properly.

People sell used cars outright all the time and don't put that down as income to be taxed. I never have included that as wage or income.

[Bandit]

Exactly. Keep in mind that in the eyes of the creditor and probably the IRS, any payments you make are to interest first and not to the principal balance and unless you use the card strictly for business, the interest is not a deductible expense.

Oh yah. Forgot about that part. This is so complicated I may be better off not even putting down medical deductions. Well, maybe just a few dollars. For example one of the cards I charged 5,000 to my Doctor with 0% interest and have already paid back 500 to that card. I have a few hundred dollars straight from my checking account too, in checks and debit.

Maybe I will just keep it real simple so I don't have to go through what Louis is going through.

This is another good reminder though, not to put huge medical bills on credit cards, if you don't have to when expecting to use it as a deductible at tax time.

[Louis]

they are questioning a reimbursement check from your insurance as income?
They have it misconstrued (they would like to tax those funds twice without realizing) because they are only looking at figures and not exactly how the figures were applied.
I feel you have the facts straight and the IRS has not put it all together properly.

People sell used cars outright all the time and don't put that down as income to be taxed. I never have included that as wage or income.

As I stated in an earlier post, they asked me to send in copies of bank statements and match up on the statements where a check was that had cleared for a medical expense. After I did this, about a month later they sent me a spread sheet listing all the deposits on those statements and said that unless I could show substancial proof that a particular deposit was not taxable, they would consider it as income. Funny thing was that I did not even send statements in for the whole twelve months of the year, just the months where there were checks cleared for medical expenses.

I have felt for the last few months that they are looking for something, but they are not sure what it is and yes I really think they are a bit confused, but I also realize that will not stop them from possibly assessing me with a deficiency !

[Granny]

I have felt for the last few months that they are looking for something, but they are not sure what it is and yes I really think they are a bit confused, but I also realize that will not stop them from possibly assessing me with a deficiency !

Louis, that's the way they operate. Once you are in audit, they are on a fishing expedition. And they will fish until they catch something.

And people wonder why I keep every single solitary receipt for every stick of gum and every dime deposited.

[dscurlock]

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 !

how much deductions are you talking about? I think a single person is allowed $1500 in deductions, and married $3,000

so lets say you are married and you took $3,000 deduction, but your medical was $5,000 - so your real deduction is $2,000
that might lower your tax bill by a few $$ not much.

if you find around $10k in deductions, that will normally get you a nice little refund check back rather then owing a big fat tax bill.

[dscurlock]

Oh yah. Forgot about that part. This is so complicated I may be better off not even putting down medical deductions. Well, maybe just a few dollars. For example one of the cards I charged 5,000 to my Doctor with 0% interest and have already paid back 500 to that card. I have a few hundred dollars straight from my checking account too, in checks and debit.

Maybe I will just keep it real simple so I don't have to go through what Louis is going through.

This is another good reminder though, not to put huge medical bills on credit cards, if you don't have to when expecting to use it as a deductible at tax time.

I dont know what we would do if we did not have health insurance, my wife has had at least 4 various operations
in the last four years that probably exceed over $150,000
her recent was about $50,000 and our part of it was around
$1,500

[B12]

dscurlock...huh???


Hey Granny, you are right, probably something other than the BK triggered the audit. No way would they audit every single BK case....would they?

I am a little calmer now, lol. Will let you know what the accountant says.

[Granny]

dscurlock...huh???

Hey Granny, you are right, probably something other than the BK triggered the audit. No way would they audit every single BK case....would they?

I've had several clients file Bk and none was every audited.

[B12]

Thank you Granny. You are like a good glass of cabarnet for the nerves.

[PaKettle]

uh oh!

I think this is going to affect me - IF they find it...

Let me see if I understand what you are talking about in this thread...

So, I had about $18k in dental and medical deductions on my 2006 taxes, which got us back $3k or so on our returns for 2006.

Now, most of that $18k was paid for with credit cards. Some of it was direct payment from credit cards and some of it came out of the checking account, but was largely also paid for by credit cards because we had balance transfers in there.

But who is to say which part was cash from my income and which part was cash from the credit card transfers? I'd say I paid for the medical and dental with MY income and used the transfers for other things! ;)

So now I'm filing Chapter 7 and they would say that because I no longer owe that credit card debt which was used to pay medical expenses, that my tax return for the previous year is wrong??

Makes no sense to me, because
1) How do they know how much of that debt I paid back already?
2) the tax return was RIGHT at the time I filed it!

What they would be doing amounts to changing a tax return based on FUTURE information! How can that be correct???

Am I understanding the above correctly?