Chapter 7 & IRS Question

[Bandit]

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??

That pretty much sums it up. And the truth is, if they go back to the previous year, they will see that none of those charges and transfers would be there at all if it were not for the hosptial and everything that followed it.

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?

It really is based on future info, though already happened. That is the difficult part.
1) that is the part we have to prove and it is already jumbled up and all over the place.

If you go back to one of Grannys post, they could be seeing it all as double dipping, even though not all of it is. Then if you look at some of Louis situation they think insurance reimbursment is income. It turns into a big mess that seriously, I think only an attorney or a good accountant can straighten out.

[Bandit]

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

That is good insurance. If I have no complications my bill should not exceed 40,000 but I am responsible for all of it. I wont even go into explaining the whole thing because it is already too complicated...not the medical part, but the bill part.

I know there is no price, no home, no asset, no winnning lottery that can ever replace our health. I am real sorry your wife has had to suffer through 4 operations.

[PaKettle]

That pretty much sums it up. And the truth is, if they go back to the previous year, they will see that none of those charges and transfers would be there at all if it were not for the hosptial and everything that followed it.



It really is based on future info, though already happened. That is the difficult part.
1) that is the part we have to prove and it is already jumbled up and all over the place.

If you go back to one of Grannys post, they could be seeing it all as double dipping, even though not all of it is. Then if you look at some of Louis situation they think insurance reimbursment is income. It turns into a big mess that seriously, I think only an attorney or a good accountant can straighten out.

I don't know. I can see how they would consider your getting money back on taxes from credit cards you did not pay off as being questionable. However, the fact that you did not KNOW that when you filed the taxes should be sufficient enough to keep the tax refund in my opinion. Basically you are getting money back that you paid in, the government isn't PAYING you that money out of their funds. So the fact is, you filed an honest return and got back some of YOUR money based on medical expenses. What does it matter that LATER you filed bankruptcy.

I think this is b.s. on the part of the IRS.! But then again, they are the IRS, they can apparently do whatever they want to do...

I'll be real curious to see if anyone ends up having to pay any money back on this kind of tax auditing!

[Granny]

Pa and Bandit and Catchme,

I really don't think you need to worry because they just happened to open a can of worms with Louis. I really don't believe his bk started this process.

But this should be a lesson to not cheat on your taxes because you don't know what's going to happen in the coming years and it very well could come back to bite you, when you least expect it.

And Louis, please don't think that I am insinuating that you cheated. I think you just had a run of bad luck and got picked for an audit. I sincerely hope you get all this straightened out in your favor.

[Granny]

So the fact is, you filed an honest return and got back some of YOUR money based on medical expenses. What does it matter that LATER you filed bankruptcy.

That's the part that will keep them from filing tax fraud and tax evasion charges.

[CATCHMEIFYOUCAN]

Louis !

I submitted your original question on lawyers.com to the taxagent. This site is pretty straight forward (a message board), no sympathy if your looking for any, unlike this site. Most of the time they tell you "you should be consulting your attorney!" Anyways, I thought I would give your question a shot!

http://community.lawyers.com/messageboards/message.asp?channelId=&subId=&mid=985858&mbid=43&t hreadId=3093

Owing taxes deductions that were discharged.
By: catchmeifyoucan Consumer
Date: 9/23/2007 10:24:19 PM Member Since: 6/1/2006

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

Will keep you posted to see what the "taxagent," thinks !

Best to all Catchmeifyoucan

[Louis]

Pa and Bandit and Catchme,

I really don't think you need to worry because they just happened to open a can of worms with Louis. I really don't believe his bk started this process.

Correct - The initial audit letter was in reference to medical expenses for 2004, the BK came to light after the fact.

[Louis]

Louis !

I submitted your original question on lawyers.com to the taxagent. This site is pretty straight forward (a message board), no sympathy if your looking for any, unlike this site. Most of the time they tell you "you should be consulting your attorney!" Anyways, I thought I would give your question a shot!

Best to all Catchmeifyoucan[/B][/COLOR][/COLOR]

Hey -- Thanks a lot for the help

[CATCHMEIFYOUCAN]

Im Just Concerned

I'm just concerned not only for you BUT for me as well Since I've been able to write off my Gambling wins, I hear its a red flag to the IRS . AND you usually get hit after a couple of years !


Best to you, CATCHMEIFYOUCAN !

[Bandit]

I don't know. I can see how they would consider your getting money back on taxes from credit cards you did not pay off as being questionable. However, the fact that you did not KNOW that when you filed the taxes should be sufficient enough to keep the tax refund in my opinion. Basically you are getting money back that you paid in, the government isn't PAYING you that money out of their funds. So the fact is, you filed an honest return and got back some of YOUR money based on medical expenses. What does it matter that LATER you filed bankruptcy.

I think this is b.s. on the part of the IRS.! But then again, they are the IRS, they can apparently do whatever they want to do...!

Agreed on every point. This would be very easy to settle if it were only one bill and one form of payment but medical bills are many bills and many forms of payment that you have to go thru and match up. That is not easy to do and remember everything, unless you made a journal through the recovery.
IRS is only seeing what they want to see & that is TAX & INCOME. It is the deduction and Bk they are not getting right.

I'll be real curious to see if anyone ends up having to pay any money back on this kind of tax auditing!

They will just keep going round & round in circles, up & down with a yo yo until time runs out & I bet nothing happens except for a big question mark. The guy has already given them everything they asked for (except for I think he said about 10% he could not find) & this has been going on for months.

What they need is someone at IRS who has lived full circle through every segment, like we have, who can sit down and say, "I know what happened." They simply do not understand it the way we do.

Just the headache of all that makes me not even want to make a medical deduction even though I know it is ok to do. I really have no choice but file a BK, I just do not want the medical deduction coming back to haunt me. It is very easy for them to turn a 6 month medical/accident into 3 or 4 years of headaches after being truthful and honest because they do not understand the whole picture.

[Bandit]

Pa and Bandit and Catchme,

I really don't think you need to worry because they just happened to open a can of worms with Louis. I really don't believe his bk started this process.

.

Thanks Granny. I am not too worried. I dont think it was the Bk either. It has been an amazing puzzle to solve. We are smarter than the IRS when it comes to this stuff.

I will wait til tax time this year and see if it will be worth it to even make a medical deduction. I do have a lot of receipts but that does not seem to matter with the IRS because they don't get what really happened.

[Bandit]

I'm just concerned not only for you BUT for me as well Since I've been able to write off my Gambling wins, I hear its a red flag to the IRS . AND you usually get hit after a couple of years !


Best to you, CATCHMEIFYOUCAN !

Hey, at least you will know what to expect if it does. Hopefully yours would not be as complicated to explain.

[Granny]

Thanks Granny. I am not too worried. I dont think it was the Bk either. It has been an amazing puzzle to solve. We are smarter than the IRS when it comes to this stuff.

That's not hard to do, being smarter than the IRS. You just gotta learn their rules and then beat them at their own game.

[Louis]

Looks like the lawyers.com message board has confirmed the answer I thought all along:

Quoting:

You can only take tax deductions for medical bills that you actually paid in that specific tax year.

Therefore, if you claimed the deductions when you hadn't actually paid the bills yet, that was improper.

If the bills were discharged in bankruptcy, then you never had to pay them, therefore you would not get a deduction for them.

If you did pay the bills in the tax years in question, then yes, you should fight the IRS tooth and nail.

Getting my tooth and nail ready, if needed

[CATCHMEIFYOUCAN]

Louis

By: Taxagent Lawyer
Date: 9/24/2007 4:46:38 PM Member Prior To: 12/5/2005


Deductions are only allowed to the extent that you PAID them in the tax year involved. It is not enough that you incurred the expense and were billed by the doctor or medical provider. You must have actually paid the bills for them to count. Therefore, the medical bills that you did NOT pay and were discharged in the bankruptcy are NOT deductible. As a result, it would be futile to dispute disallowed medical deductions in tax court if the basis for denying it is that you did not pay it because you would lose. Why the IRS is even hesitant on that issue is beyond me, this is black letter tax law.

Looks like the Tax Agent added his two cents! I think I'm going to ask about the gambling than too!

Damn, I'm worried now. Even though I haven't gotten an audit!

Catchmeifyoucan