Back Tax Debt

[pba1817]

Hi all,

I plan to file Chapter 7 on a variety of debt. I am self employed, no employees. I have roughly $65,000 of unsecured debt. My earnings are considerably lower than they have been in recent years(join the club right!?!?) I do not own any assets. In late 2007/early 2008 was audited for tax years 2005, 2006, and 2007. I was assessed an increassed tax owed +penalties and interest of about $75,000.

I was sent Notice of Deficiency(90 day) letter from the IRS for tax year 2005, stating their claims as the the taxes owed from that year.

My question is as follows-

I plan to file on my unsecured debt, as well as ALL of my 3 years of back taxes owed. Although I am confused as to how to include the 06 and 07 back taxes since the BK law states back tax debts have to be a minimum of 3 years old. Do I just sit on the 05 assessment, and eventually the 06 assessment and hope the IRS fails to levy my bank accounts or earnings until the 07 becomes BK eligible(2011)?

Thanks...

[Bankruptcy20]

I am not a tax lawyer or a bankruptcy lawyer.

But, I'm trying to learn up on all this stuff. I don't think you will get a lot of answers on tax here. See my threads on this topic recently, and my sense is that most people on this forum are dealing with lower levels of debt and generally expect to receive tax refunds rather than have a recent tax bill.

Some thoughts pop up:

1) you cannot discharge 2006 and 2007 taxes in Chapter 7
2) you can discharge, if you meet the various criteria, which I can't remember all of them, but three year old stuff is one of them.
3) here's the dilemma. File Chapter 7, then you can't refile BK for many years. So, your 2006 and 2007 is there, like a ticking timebomb accruing interest and penalties
4) maybe Chapter 7 to purge 2005 and older... then file an Offer in Compromise on your 2006, 2007, 2008 after Chapter 7
5) maybe file Chapter 13, wherein taxes can be looped in

See my thread on timing of Chapter 7 and OIC's that I started yesterday. But, I've spoken to some BK attorneys, and they get a glazed look if you start talking about tax liability. Call the IRS or a tax attorney and they say they are not a BK expert.

Oddly, I can't seem to get a straight, thoughtful answer to this obvious issue: if someone is legitimately filing Chapter 7, how do you deal with 1 to 2 year old tax liabilities which are not discharged?

[StartingOver08]

I am not a tax lawyer or a bankruptcy lawyer.

But, I'm trying to learn up on all this stuff. I don't think you will get a lot of answers on tax here. See my threads on this topic recently, and my sense is that most people on this forum are dealing with lower levels of debt and generally expect to receive tax refunds rather than have a recent tax bill.

Some thoughts pop up:

1) you cannot discharge 2006 and 2007 taxes in Chapter 7
2) you can discharge, if you meet the various criteria, which I can't remember all of them, but three year old stuff is one of them.
3) here's the dilemma. File Chapter 7, then you can't refile BK for many years. So, your 2006 and 2007 is there, like a ticking timebomb accruing interest and penalties
4) maybe Chapter 7 to purge 2005 and older... then file an Offer in Compromise on your 2006, 2007, 2008 after Chapter 7
5) maybe file Chapter 13, wherein taxes can be looped in

See my thread on timing of Chapter 7 and OIC's that I started yesterday. But, I've spoken to some BK attorneys, and they get a glazed look if you start talking about tax liability. Call the IRS or a tax attorney and they say they are not a BK expert.

Oddly, I can't seem to get a straight, thoughtful answer to this obvious issue: if someone is legitimately filing Chapter 7, how do you deal with 1 to 2 year old tax liabilities which are not discharged?

I filed a Ch 7. I was discharged in a Ch 7. I have tax liabilities that I pay because the tax liability is not dischargable. (My filing was large BTW $1.M)

I gave you a solution about the OIC. In my case I AM insolvent - using the BK paperwork or the IRS paperwork. The IRS agents DO NOT have the solution. You said you called the IRS - naturally the agents there represent the IRS. If you talk to more than one IRS agent, you get more than one answer. You have to get professional help to get the OIC through - in my case my CPA. It is something I am currently working on post BK. That was my choice - to wait until the BK was finished before persuing the OIC.

Believe me, you are not the only one that has filed Bk with tax liabilities.

[Bankruptcy20]

Agreed. And thank you for this and the other response.

My comment about a straight-answer for "pba" here (as it's his first post) was more targeted at the BK attorneys and others I've spoken to, who frankly seem muddled on this topic.

In regards to this forum, I just don't see as many threads on this sort of tax situation (when one owe recent non-dischargeable taxes) but there's a lot more posts where people talk about recent tax refunds and how that works in one's means test, etc... It strikes me like the question often posed: "have any of you received an objection from a CC"? And three pages later, no one has, or no one is sharing the details. It's not a complaint, but more of a heads-up.

So, has anyone tried doing an OIC during the months leading to a BK? I'm not holding my breath for any real stories. Whether that is the right answer or not, it strikes me that taxes are often left to accrue during the BK process and then dealt with later.

How many times have you heard of people file Chapter 7, then realize this problem part-way through the process and then call IRS, and be told an OIC is not available during a BK? OIC, in and of itself, is generally not well-known. You luckily have a CPA. And in a way, you are in an easier situation, as OIC (or perhaps, perpetual permanent non-collectible status, which doesnt really exist) may be the only viable plan, particularly as you have completed your own BK journey.

Not to say you were in this scenario, but in speaking to live people and reading these forums, much of the time before a BK seem to be anxiety/fear driven by the collection agencies (an over-generalization here), and the IRS is a behemothic problem for later... Heck, if the IRS is serving liens and sending agencies, those taxes are likely to be old, if not 3 years old, so that may not be a problem for dischargeability.

Sorry for the ramblings. Hope I make sense. Long and short, I'd welcome more debates/discussions on recent taxes owed, particularly on a pre-planning basis.

[fltoo]

If you are going to wait until eligibility, close all bank accounts and pay bills with money orders.

Do you have any assets to attach? house, car with equity?

[StartingOver08]

The short answer to your question regarding tax liabilites - most of us are well aware when we owe the IRS pre-BK. The amount becomes more concrete because you must be current in filing your tax returns in order to file BK. So the past due amounts are readily available.

The interest and penalties are not so readily available depending upon the length of time you have been past due.

Yes, if you file a Ch 7 any previous payment arrangements made to the IRS are suspended during the BK and you must renegotiate a payment after your discharge. At that time, it is possible to suspend payments for 120 days while you sort out your situation as to either a permanent repayment (less than 60 mths) schedule or an OIC. Of course interest accrues every day the tax is not paid.

I can see where it might be advantageous to work out the OIC prior to filing the BK for some types of BK filiers. But, I don't have direct experience in that regard.

[knotholeone]

I have experience with OIC. They will not work with you unless you are dirt poor. I filed an OIC and was rejected and they immediately put a lien on my home. I always paid my payment to them on time, even through the OIC. They can be very evil, and just try to talk to them on the phone, it take hours. Good Luck.

[pba1817]

If you are going to wait until eligibility, close all bank accounts and pay bills with money orders.

Do you have any assets to attach? house, car with equity?

I do not have any assets. ie, no house, really nothing of any substantial value to anyone other than myself.

I have thought about keeping minimal funds within my bank accounts and working on a cash basis as much as possible, in the event of a IRS bank levy.

[biotechsolution]

Hi all,

I plan to file Chapter 7 on a variety of debt. I am self employed, no employees. I have roughly $65,000 of unsecured debt. My earnings are considerably lower than they have been in recent years(join the club right!?!?) I do not own any assets. In late 2007/early 2008 was audited for tax years 2005, 2006, and 2007. I was assessed an increassed tax owed +penalties and interest of about $75,000.

I was sent Notice of Deficiency(90 day) letter from the IRS for tax year 2005, stating their claims as the the taxes owed from that year.

My question is as follows-

I plan to file on my unsecured debt, as well as ALL of my 3 years of back taxes owed. Although I am confused as to how to include the 06 and 07 back taxes since the BK law states back tax debts have to be a minimum of 3 years old. Do I just sit on the 05 assessment, and eventually the 06 assessment and hope the IRS fails to levy my bank accounts or earnings until the 07 becomes BK eligible(2011)?

Thanks...

You're right you'd have to wait until April 2011 to discharge all the taxes.

You could enter a OIC to start attempting to work out a settlement. They do take a long time and it could use up at least 1-2 years of the time.
You will have to wait at least 270 days after you withdraw your OIC to filing your chapter 7. I'd wait until you either the get the bank account levy or wage levy. I think they file a wage levy much quicker.

A change with OIC requires you to put money down with the OIC filing now. Could be has much as 20% of your tax bill.

I was in a OIC for a couple years trying to work something out before I finally gave up and filed a 7 for business debt and lumped the taxes in the filing.
The one bonus was that it lasted for so long that another year was able to be included. Discharged about 300K in taxes, they weren't happy about that and threatened to take a SEP account and 401K.

That is one thing that is different. Your 401K is not protected from the IRS even if you file bankruptcy. They have the ability to levy it without a
pre-petition filed lien.

[Bankruptcy20]

Biotechsolution,

Thanks for chiming in here. You say "You will have to wait at least 270 days after you withdraw your OIC to filing your chapter 7."

I've never heard this, can you confirm this? I've not heard this from the IRS or from lawyers.

I do agree that an OIC can take long, but I had heard that a BK filing will automatically abort any OIC in process... but never that you cannot file a BK within 270 days of an OIC. This is an important point I'd like to double-check with you (and others).

[Bankruptcy20]

I think I realized the confusion, after I responded.

1. You can file BK any time, regardless of whether or when an OIC is entered into. If there is an OIC in process, it gets aborted. Point being here you intend to honor the OIC settlement post-BK.

2. If you have debt that is over 3 years old, and meet all the other criteria, it must also meet the 240 day (or in OIC's case 270 day test for incremental assessment), if you are looking to discharge the OIC reduced settlement. So, if you are looking to discharge OIC debt through your BK, then you need to wait at least 270 days post OIC assessment and before BK filing (but the taxes need to be old originally, anyways).

If you are talking about 2007 or 2008 taxes, however, this is irrelevant, as you are not near the 3 year timing criteria, so it's not dischargeable... you are just looking to cut a settlement with the IRS, and not looking to then try to discharge that OIC right after the settlement...

Does this match your understanding?

[biotechsolution]

you're correct. You must wait 270 days after withdrawing an OIC to file
bankruptcy to have the taxes eligible for discharge.

there was a case that went to the supreme court regarding the tolling periods when filing a bankruptcy. At one time the 3 year filing and 2 year lookback period were tolled during a OIC period. But the supreme court rulled
that only a chapter 13 tolled that time period not a OIC because the IRS can still collect on the outstanding debt during an OIC.

My OIC was never agreed during my 3 year period. And near 7 months before I had contact them to withdraw the OIC offer.

Starting an OIC would be one way to waste a good 2 years of collection process.

[Bankruptcy20]

Thanks. On the other hand, you read about people settling for just one dollar (see wikipedia, do a search on "offer in compromise", mid-way down).

Question for you: I thought I read somewhere that the documents you file with the IRS for an OIC is public. But, I can't find the reference again. Do you know if the IRS filings are made public, such as PACER for BK's?

Thanks.