A substitute return was orinally filed can I still discharge my taxes in a bankruptcy

[hopeandme]

Hi friends,

Since, originally posting some questions and getting great responses I thought someone might know the answer to this. I thought I met all the rules to have my taxes discharged in bankruptcy only to get some responses that are making me question this.

I have found two of the three years of taxes that I am trying to discharge. On the transcript the first thing I see for 2005 & 2006 is code 150 "Substitute Tax Return Prepared by IRS" both on 6/23/2008. In 2010 I then filed my returns. I am now weary that I don't qualify to have my taxes discharged. Is this correct?

Also, are the rules with the state the same when it comes to discharge? I have no idea if the state did a substitute return. Can I get a transcript from them as well?

Furthermore, I'm currently uncollectable with the IRS because I have an illness and I am on social security disability. I filed my returns as married filing separate but I'm afraid the IRS is going to look at my husband and my assets as joint (one reason is because we are married and another is because my attorney put some down as joint when they are not) and now try to collect from my social security disability. Should I be concerned?

I'm so stressed and wondering if I should pull this bankruptcy before the IRS thinks I have money to pay them when quite frankly we live paycheck to paycheck but it may not seem so with the assets. Maybe I should just take the IRS off of the bankruptcy and proceed with the bankruptcy? I'm just not sure. I know I'm pretty sick about all of this!!!!

Thanks for all of your help!
Hope

[Pjmax]

Did you ask your attorney about discharging the taxes? When did you file? Did you check over your petition before signing? You say your attorney listed some assets as joint, when they are not. Did you ask him/her to correct this?

You can't 'take the IRS' off your bankruptcy. You must list all your debts, you can't pick and choose what to list.

Soc. Sec. And Soc. Sec. Disability are subject to garnishment by the IRS.

I'm not an expert on IRS details and bankruptcy, so I only commented on what I know. Others will be along soon with more info.

[AngelinaCat]

Nor am I. But we tried to have our 2004 Income taxes discharged. We filed Dec. 28. 2007--the last business day of the year.

We thought we would be okay with the 2004 taxes, but we found out that because we didn't file on April 15, but actually got an extension and filed in November of 2004, we were not within the discharge-ability framework for Federal income taxes, as provided by BK law.

Florida does not have a state income tax (YET), so I am unable to help you there as well.

[justbroke]

I already answered this question in another thread. First, it really depends on how the IRS decides to respond to your bankrutpcy petition. The fact of the matter is that if you did not file a tax return, and the IRS filed a substitute tax return (and/or an assessment), then you did not file your taxes for purposes of discharge. Those taxes would be non-dischargeable.

As I wrote previously, and Des who is an attorney also wrote you in the other thread, as soon as you filed, the IRS is notified and it will go to the IRS Bankruptcy Department (Special Procedures Function - SPF). The SPF will come up with what they believe is the status of your taxes. If you are lucky, they may just write everything off and even release your tax liens. Usually, though, they will file a claim in the bankruptcy with what your tax situation and what would be dischargeable.

The rules for State taxes are the same, but don't count on a State being as, umm, efficient as the IRS.

As Des wrote in the previous thread, his process is to write a ("45 day") letter to the SPF to prod them a bit to see what they want to do and to also discourage them from keeping any liens in place after discharge.

Again, talk to your attorney. You may want to look back at the other thread where Desprifreya was very specific about how he handles these items. You can not "pull" a Chapter 7 bankruptcy. In other words, you can not voluntarily dismiss a Chapter 7 bankruptcy. (There are very limited situations in which you could dismiss a Chapter 7, or you could convert to a Chapter 13.)

I think that you need to wait until you know and understand what the IRS is going to do, and then work on remaining in a non-collectible status. I can't give you any tax advice on whether you filing married but separately, your property issues, or anything else. You need to know the IRS' position. Your attorney may not be the best with tax issues, but that would not have changed your tax issues that existed at the time you filed.

Note: the other thread is here.

http://www.bkforum.com/showthread.php?81318-Questions-for-HHM-Please-I-m-so-scared!-Any-other-esponses-would-also-be-greatly-app

[hopeandme]

Did you ask your attorney about discharging the taxes? When did you file? Did you check over your petition before signing? You say your attorney listed some assets as joint, when they are not. Did you ask him/her to correct this?

I did. I thought I met all of the rules for discharging them in bankruptcy and actually said the rules to him. He clearly doesn't understand how to discharge taxes in a bankruptcy. If you look at the rules and take them at face value it appears that I could discharge my taxes in bankruptcy. I have asked other questions on this board and someone very knowledgeable questioned the filing rule. I filed my 50-07 taxes in 2010 however when I pulled out two transcripts I saw that something called a "substitute tax return was prepared in 2008". Although no where in the "rules" does it say this doesn't mean I have filed my taxes and in fact it later says in 2010 Tax return filed from what I gather their substitute return may in fact cancel out my return.

You can't 'take the IRS' off your bankruptcy. You must list all your debts, you can't pick and choose what to list.

I forgot about this rule. You are right. In fact, I forgot to list a creditor. Yikes!

Soc. Sec. And Soc. Sec. Disability are subject to garnishment by the IRS.

Yes you are right but they weren't bothering me. In fact we live paycheck to paycheck but now I'm afraid that they are going to see my husbands assets (including 401K) and other assets that say joint which really aren't and try and collect from me. Perhaps this bankruptcy should be pulled altogether and my husband should just file (the tax is mine alone).

I'm not an expert on IRS details and bankruptcy, so I only commented on what I know. Others will be along soon with more info.

Thanks for your response!

[hopeandme]

I already answered this question in another thread. First, it really depends on how the IRS decides to respond to your bankrutpcy petition. The fact of the matter is that if you did not file a tax return, and the IRS filed a substitute tax return (and/or an assessment), then you did not file your taxes for purposes of discharge. Those taxes would be non-dischargeable.

Yes Justbroke you were the one who opened my eyes as to what wasn't clear on face value of the rules. Really that seems unfair. The normal person thinks that he or she has filed their taxes when they do a tax return. I didn't even know what a substitute return was until I spoke with you.

[hopeandme]

We thought we would be okay with the 2004 taxes, but we found out that because we didn't file on April 15, but actually got an extension and filed in November of 2004, we were not within the discharge-ability framework for Federal income taxes, as provided by BK law.

I just learned about that too! If I would have only come to this forum before filing! Ugggh! Thanks for your response. They are quite tricky when it comes to the rules. I did not try to deceive them. It was either paying them the taxes for those tax years or trying to find a doctor who could help me with my illness. I chose to try and get well. It didn't work but I had to focus on taking care of my children. I was the major bread winner and when the doctors couldn't "fix" me I lost my career and my home and was left with tax debt that has grown with mad interest and penalty.

[justbroke]

Yes Justbroke you were the one who opened my eyes as to what wasn't clear on face value of the rules. Really that seems unfair. The normal person thinks that he or she has filed their taxes when they do a tax return. I didn't even know what a substitute return was until I spoke with you.

If those returns were filed under IRS 6020(b), meaning that the IRS made the return without any information from you and you did not sign that "substitute" return, then the IRS will probably consider them non-dischargeable.

The information below is from the IRS manual. Their manuals are terrible and that's why you need a tax specialist just to read them. In any event, the IRS position has been that a tax return that THEY filed without any help from you, is a return filed under 6020(b) and it is considered to "not" be a tax return filed for purposes of discharge in bankruptcy. I can only point you to the information. Maybe you could sit down with your attorney and ask him about the dischargeability question specifically. Bring your questions and be prepared to take notes. I would also suggest that you ask your attorney about how Des handles tax cases.

If I would have only come to this forum before filing! Ugggh! Thanks for your response. They are quite tricky when it comes to the rules.

Coming earlier would, unfortunately, not have fixed this particular tax issue. It is said to be done and that it "is what it is". Unfortunately the dischargeability question of the taxes was created the day that filing that specific return was considered past due.

Again, I wish the best for you and hope the IRS just decides to discharge the taxes, but I can't tell what they would do.

IRM 5.9.2.9.1.2 (03-01-2007)
A Valid Tax Return

For Discharge Purposes. 11 USC § 523(a) was amended by BAPCPA to provide that a tax return prepared by the IRS under IRC § 6020(a) or a "written stipulation to a judgment or a final order entered by a non-bankruptcy tribunal" is a "return" for the purpose of discharge, but a return prepared under IRC § 6020(b) is not a return for the purpose of discharge.

[despritfreya]

We have some new info which, it appears, Hope only discovered recently. The IRS filed substitute for returns.

While the issue of the impact of substitute returns has not been litigated in all jurisdictions, the ones I do know of all hold that if a substitute for return was filed for a particular year, that year will not be dischargeable even if the taxpayer eventually filed his/her own return. What will be discharged (assuming the tax year is old enough and the taxpayer filed the return at least 2 years before filing bk) is the amount of tax that exceeds the amount assessed from the substitute for return. For example. . .

Tax year 2005;
IRS filed substitute for return in 2009 and assessed $15k;
Taxpayer filed his own return in 2010 and it shows that the correct amount owed is $20k;
The amount dischargeable is only $5k - the additional amount not calculated by the IRS.

OP really needs to sit down with a good bk attny and look at all of these details.

Des.

[justbroke]

Thank you Des. That is interesting information! What if the substitute return indicated a higher tax liability (the numbers were reversed)? (Example: the IRS filed a 6020(b) Substitute return for $20K, but the taxpayer later filed an actual return and the liability was $15K? I suppose the non-dischargeable amount is the lower of the two?)

[hopeandme]

We have some new info which, it appears, Hope only discovered recently. The IRS filed substitute for returns.

While the issue of the impact of substitute returns has not been litigated in all jurisdictions, the ones I do know of all hold that if a substitute for return was filed for a particular year, that year will not be dischargeable even if the taxpayer eventually filed his/her own return. What will be discharged (assuming the tax year is old enough and the taxpayer filed the return at least 2 years before filing bk) is the amount of tax that exceeds the amount assessed from the substitute for return. For example. . .

Tax year 2005;
IRS filed substitute for return in 2009 and assessed $15k;
Taxpayer filed his own return in 2010 and it shows that the correct amount owed is $20k;
The amount dischargeable is only $5k - the additional amount not calculated by the IRS.

OP really needs to sit down with a good bk attny and look at all of these details.

Des.

The amount next to the substitute tax return prepared by the IRS on 6/23/08 is $0.00 for both 05 & 06 (I can't find 07); however on 2/29/09 it says additional tax assessed for 05 is $52,581 and for 2006 $42,079 (I owed way less than that then), on 7/16/10 it says tax return filed and then on 10/4/10 Code 167 it says reduced or removed penalty for filing tax return after the due date and gives me a credit, then Code 277 it says the same thing again and gives me another credit and finally code 197 also on the same date. Any light at the end of the tunnel since there is no figure next to the date on the transcript where it says they filed a substitute return? I'm hoping that it may be good news and that they actually did an assessment in 09 since there is no value where it says substitute return. Maybe there is no value put there. I'm trying to be optimistic.

I'm wondering if it would be best to take my name off of the bankruptcy if a substitute return (even if it shows no value) is what is taken in to consideration.

[justbroke]

I'm wondering if it would be best to take my name off of the bankruptcy if a substitute return (even if it shows no value) is what is taken in to consideration.

I do not know what you mean by take your name off the bankruptcy. You can not voluntarily dismiss a Chapter 7 bankruptcy. You could "try", but the Trustee and Court may not let you have the case dismissed.

As for what all the numbers mean, that's all IRS internal transaction codes which tells what they did. A tax attorney/specialist is probably the only person to decipher the codes. If it already reads "substitute tax return" than one was prepared. Otherwise, it would just be an assessment, as far as I know. (I have been assessed in the past and do not have any "substitute" tax returns.)

[despritfreya]

JB asked,

What if the substitute return indicated a higher tax liability. . . I suppose the non-dischargeable amount is the lower of the two?

Assuming the return passes any audit that may be done, that would be correct.

As to Hope’s questions on the transcript coding, I really don't know. There may be only one way to find out. . . ask the IRS (or, as JB suggests, ask a tax attny). Again, those folks at SPF really do know what they are doing and will give you the straight scoop as it relates to the discharge of taxes.

Bottom line is. . . Either the tax is or is not dischargeable. There is no mystery to this unless one of the reasons for non-discharge is an allegation of fraud which does not appear to be an issue for Hope.

Des.