Chapter 7 & IRS Question

[Louis]

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

You must have actually paid the bills for them to count.

That`s Me

[B12]

Catchme,

That response does not address the issue we were talking about. We are wondering about bills that are PAID on cc's and then, the cc debt is discharged in BK.

My acct. out of town for a few days, so did not speak with him.

But, I am going by what Granny says, that the chance of an audit just because of BK is pretty slim.

[PaKettle]

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

Either I misunderstood what was said before , or I am misunderstanding what you said above, or BOTH!

In my case, (I apologize for adding my case to the mix, but I think this is instructive for others in my shoes) I DID pay the medical bills (with my credit cards) before I filed bankruptcy (way before, 10 months ago) and then filed those paid expenses as medical deductions on last year's taxes.

So am I prone to be audited and made to repay the refund I got based on those medical expenses I paid with my credit cards (which I am only NOW filing bankruptcy on) or not? IN other words, I did not file bankruptcy on any medical bills, the medical bills were PAID with the credit cards. It's the credit cards I am filing bankruptcy on.

I don't see how this could be improper - I had no way of knowing I was going to file bankruptcy when I filed my tax return with those paid medical expenses!

[Granny]

Either I misunderstood what was said before , or I am misunderstanding what you said above, or BOTH!

In my case, (I apologize for adding my case to the mix, but I think this is instructive for others in my shoes) I DID pay the medical bills (with my credit cards) before I filed bankruptcy (way before, 10 months ago) and then filed those paid expenses as medical deductions on last year's taxes.

So am I prone to be audited and made to repay the refund I got based on those medical expenses I paid with my credit cards (which I am only NOW filing bankruptcy on) or not? IN other words, I did not file bankruptcy on any medical bills, the medical bills were PAID with the credit cards. It's the credit cards I am filing bankruptcy on.

I don't see how this could be improper - I had no way of knowing I was going to file bankruptcy when I filed my tax return with those paid medical expenses!

Pa,

As far as your doctors are concerned, they were "paid" because you charged their bill to the credit card and they won't be charged back for it. But according to the IRS, you did NOT pay the medical bills, you charged them and then didn't pay the credit card. If you are audited, they will throw out the deductions because you didn't "pay" the doctor bills or the credit card charges.

The fact that you didn't anticipate filing BK has no bearing. I don't think the IRS would accuse you of trying to be deceitful or dishonest, but IF you were audited and IF they find out that you filed BK and not pay the credit cards for those dr. bills, they will disallow your deductions.

I don't think the IRS is going out looking for people who took medical deductions and then filed BK, but the fact that you deducted 18k in medical bills is a lot and that alone could trigger an audit.

Sorry to be the bearer of bad news, but that's what this all means. Hope you don't get audited.

[Louis]

Pa,

As far as your doctors are concerned, they were "paid" because you charged their bill to the credit card and they won't be charged back for it. But according to the IRS, you did NOT pay the medical bills, you charged them and then didn't pay the credit card. If you are audited, they will throw out the deductions because you didn't "pay" the doctor bills or the credit card charges.

The fact that you didn't anticipate filing BK has no bearing. I don't think the IRS would accuse you of trying to be deceitful or dishonest, but IF you were audited and IF they find out that you filed BK and not pay the credit cards for those dr. bills, they will disallow your deductions.

This is completely contrary to what the tax lawyers are saying on lawyers.com. They are remarking that if a person does "pay" a medical expense with a credit card and then later files BK, the deduction still stands because the bill was actually paid by the person.

They are saying that it is very clear in the tax laws.

[Granny]

I haven't read what is on the other website, only what is posted here that was cut and pasted from there. And my interpretation of what was posted here is that it's not deductible.

You guys believe what you want, if it were me and I had taken a large deduction for expenses that I didn't actually pay, I'd be filing an amended return.

Please post a link to the other website so I can read what these guys are saying. But then accountants tend to be more conservative than lawyers.

[Granny]

I was able to find the thread. All I can say is be glad that I'm not your auditor, because I would throw out the deductions because you didn't "pay" them, you charged them and then didn't pay.

And did you notice the taxagent changed his opinion in the middle of the thread? He's wishy-washy.

Again I will state, accountants are more conservative than lawyers (Enron being the exception) and that's why lawyers have the reputation they do and that's why accountants have the reputation they do.

[Louis]

I was able to find the thread. All I can say is be glad that I'm not your auditor, because I would throw out the deductions because you didn't "pay" them, you charged them and then didn't pay.

And did you notice the taxagent changed his opinion in the middle of the thread? He's wishy-washy.

Well ... I guess I am glad you are not the auditor

And no ... I see no varitation in the two replies the lawyers made. Both replies say the exact same thing, medical expenses that were actually paid by credit card, etc ... are totally allowable even when the individual filed BK. Now if the individual claims the medical deductions and never actually paid them with a credit card, etc ... then there is no allowance for it by the IRS.

[CindyLou]

Tax laws are very clear. If you pay something with a credit card in a tax year it is considered paid! You do not have to pay the credit card bill for it to be considered paid. Here's another example of how this works....you could donate $5000 to March of Dimes on Decemeber 31, 2007, charge it on your Hooters Mastercard...do your Taxes on January 1st, 2008 and take it as a charit. dedudction for 2007! As long as its charged in 2007. Goes for both donations and deductions of any kind. The bankruptcy, in my opinion was unknown, came in the future, and is therefore a non-issue and should be fought and won!!!!! Check out the IRS publications on deductions. It is there is black and white re: credit cards and says as long as its "charged on the credit card in the tax year." end of story.

[Bandit]

The bankruptcy, in my opinion was unknown, came in the future, and is therefore a non-issue and should be fought and won!!!!! Check out the IRS publications on deductions. It is there is black and white re: credit cards and says as long as its "charged on the credit card in the tax year." end of story.

Wouldn't there be some kind of cap on doing that?
Take this as an hypothetic situation:

Income-25,000
Medical bills charged- 100,000

Actual medical bills paid out of pocket- 10,000
Deduction in filing tax- 110,000
100,000 in medical bills on credit card discharged later in BK.

I could make a nice little fortune trying that.

The IRS would end up not only paying my taxes but also paying me back for my own medical bills that were charged & later bankrupted. I could end up with about 30,000 extra dollars in my pocket.
Is there really that big of a loophole in/between those two laws?
How is the IRS going to allow that?

[CindyLou]

i dunno ..... what do I know? I'm sure there is a cap on what you can deduct vs. what you make.....I just know that you CAN deduct what you "charge" on you credit card in the tax year. That is a fact for sure. I would think that if that was the case (having a 25,000 income and 100,000 deduction) then a skilled accountant would be doing the taxes, but if you made 25,000 you probably wouldn't have a 100,000 credit line???? That would be my guess.

[Louis]

Wouldn't there be some kind of cap on doing that?

I could make a nice little fortune trying that.

The IRS would end up not only paying my taxes but also paying me back for my own medical bills that were charged & later bankrupted. I could end up with about 30,000 extra dollars in my pocket.
Is there really that big of a loophole in/between those two laws?
How is the IRS going to allow that?

Don`t forget that there are thresholds that are in place, another words on my 2004 taxes of which I could have ficticiously added another $50,000.00 to my deductions, the refund would not have changed from the present one I received.

[B12]

CPA called this morning and here is what he said on this matter.

The tax deductions stay as is on the return and there is no need to file an amendment on deductions that were charged to a cc and then that credit card debt discharged in BK.

However, the cc company files a discharge of indebtness statement and you receive a 1099 (income) for the debt discharged. He said that he has never seen a BK client NOT receive this 1099.

In essence, the IRS is making you claim as income any debt that has been charged to a cc, and actually not paid, because that cc debt is discharged.

Bad news, I would say. But, it makes sense.

[Louis]

CPA called this morning and here is what he said on this matter.

The tax deductions stay as is on the return and there is no need to file an amendment on deductions that were charged to a cc and then that credit card debt discharged in BK.

However, the cc company files a discharge of indebtness statement and you receive a 1099 (income) for the debt discharged. He said that he has never seen a BK client NOT receive this 1099.

In essence, the IRS is making you claim as income any debt that has been charged to a cc, and actually not paid, because that cc debt is discharged.

Bad news, I would say. But, it makes sense.

1099,s do not apply to chapter 7 BK,s, only if the credit card company issued a write off instead of chapter 7, then you would receive the 1099.

I had several CC,s and clearly checked on this before I filed.

For example, if you owed $20,000.00 to the credit card company and they settled with you for $10,000.00, then you would receive a 1099 for $10,000.00 to file as income. But if you file the whole $20,000.00 in BK and it is discharged, no 1099 is issued.

[Bandit]

It is possible to have an unsecured credit line 4X the income, certainly not with one bank but with several banks. It is possible to charge all the medical bills and max it out.
I would never do that. Others might but I wouldn't.