It’s that time of year again and the tax man cometh. I’m no tax attorney, however, in 22 years of law practice, I’ve seen my fair share of clients with tax issues. These issues range from just under a few hundred dollars to $125,000.00 or more. Of course, by the time the taxpayer comes to my office they are totally overwhelmed with the existing tax debt. In some cases, there is a large amount of actual tax debt which, typically, includes a severe amount of penalties and interest. In other cases, the tax debt is a result of the non-filing of required returns, in which case, the IRS imputes excessive amounts of tax liability, against the taxpayer. This amount remains due and payable until sufficient information is provided for a more accurate recalculation of the presumed tax liability. In either case, penalties and interest are assessed and continue to grow at a rapid and, for most, an unmanageable rate. Finally, there are those clients that wait to address the issue after a levy, attachment or wage garnishment has already been processed, leading to an immediate and/or devastating loss of asset(s), including a potential or existing reduction in pay of up to 25% per pay period.
Of course, through representation, I have successfully been able to reduce and/or eliminate a variety of tax debt. So, whether it be old taxes and/or new, just because the tax man may be coming to collect, it doesn’t necessarily mean he will be paid completely or sometimes, at all. If unfiled and/or unpaid tax debt is likely to head in that direction, here’s what can be done, right now, to make the ultimate tax visit a bit less taxing:
- If taxes are owed and simultaneous payment is not possible, file the tax return anyway. Read carefully now, I said FILE the return, not PAY the return. While there will be a penalty and interest assessed for the failure to pay the taxes that are due, the simple act of filing the tax return will save the taxpayer from the additional failure to file penalty assessment. For more information on exactly how these penalties and related interest are calculated and assessed, visit this link: http://www.irs.gov/uac/Failure-to-File-or-Pay-Penalties:-Eight-Facts.
- If a tax liability is contemplated and the tax return cannot be completed by the deadline, fear not. Everyone has the option of requesting an extension. The mere act of timely filing and requesting an extension, will also work to eliminate the assessment of the failure to file penalty. However, the failure to pay penalty along with interest will be assessed until the balance is paid.
- If taxes are complete but there is an inability to immediately pay the liability, again, file the return to avoid the failure to file penalty; pay as much of the liability that is possible and immediately contact the Internal Revenue Service for a repayment plan, being sure to send in payments while the payment plan is being processed. Once a payment plan formally is set up, be sure and make payments regularly and timely, preferably, at the beginning of the monthly cycle and not at the end. Payments made at the beginning of any billing cycle, will reduce the remaining principal balance and lessen the interest that is calculated for the remainder of the month. Of course, while the initial failure to pay penalty will remain, sending in extra smaller amounts, here and there, will also reduce the amount of interest that will be ultimately assessed. Finally, don’t let any month go by with any payment. If it’s not possible to send the full amount, send in a lesser amount. Again, every payment reduces the principal balance used for the calculation of any future penalty and/or interest and will, thus save you money.
- If taxes are owed and it is believed that the amount is beyond the taxpayers’ ability to repay, the taxpayer is facing the failure to file penalty, the failure to pay penalty along with future interest. In this scenario, it may be worth considering the submission of a Offer in Compromise with the Internal Revenue Service. It takes some time to fill out the application and gather supporting documents, but a thorough presentation, which convinces the IRS of an inability to pay in full, could result in a considerable reduction in tax liability. There are a variety of ways to negotiate repayment pursuant to an Offer in Compromise, so be sure and visit the IRS website for instructions. In some cases, the IRS will require an initial good-faith or lump sum payment, along with the application. In others, the IRS may even consider the taxpayer uncollectible and cease collection efforts altogether. But beware, this doesn’t mean that the tax debt will necessarily go away, it just means that the IRS will lie in wait until they believe circumstances have changed. One more point: when presenting a budget to the IRS, note that they will determine, based upon your geographical location, whether or not there is an ability to repay the tax liability, based upon what THEY believe are reasonable monthly expenses and not based upon what you may believe to be reasonable monthly expenses.
- If the above suggestions are not viable options and the existing tax debt is absolutely overwhelming, consider filing for bankruptcy and getting a fresh start. This will allow for an immediate halt to any wage garnishment; a complete discharge or reduction of existing tax debt through a repayment plan; the opportunity to return to reasonable wage withholding exemptions and provide an opportunity to create a manageable future budget. In addition, and depending upon how old the taxes are and whether or not the tax returns were filed on time, in a Chapter 7 case, tax debt may be 100% dischargeable (forgiven). Alternatively, in a Chapter 13 bankruptcy case, certain tax debt may be reduced down to as little as $.10 on the dollar. Again, this is heavily dependent upon the age of the taxes, whether or not they were filed on time and whether or not a levy has already been attached. Further analysis by a qualified bankruptcy attorney can help you determine what tax debt will be considered priority, and require full payment, as opposed to what tax debt will be considered unsecured and subject to significant reduction. Be warned, if bankruptcy is even the slightest consideration, past late filings, levies and attachments can be a serious impediment to any reduction of the tax debt, potentially leaving the total amount due and payable, in full, at 100%. Thus, timing may also be a consideration when it comes to any actual bankruptcy filing.
- For those who may have recently filed bankruptcy and are awaiting confirmation, please take note that the IRS and the Bankruptcy and Tax Courts are all Federal agencies. Thus, completed tax returns, at least in the State of Maryland, must be filed before the Court will entertain the confirmation of any proposed Chapter 13 Plan. Of course, rules may vary from State to State, so a review of local jurisdictional requirements is an absolute must.
- For those who are already in a Chapter 13 bankruptcy, please note that the debtor is required, at least in the State of Maryland, to provide the Trustee with a copy of completed tax returns every year, for the life of the Plan. In addition, unless some or all of the required tax returns have been covered by available exemptions, please note that any tax refund, at least in the State of Maryland, must be turned over to the Trustee, as additional payment(s) towards existing and outstanding debts. Failure to turnover tax refunds AND returns, during the life of the Plan, can lead to the failure and/or dismissal of the Chapter 13 case. Again, States vary, so it is imperative that you review the rules in any applicable local jurisdiction.
- Finally and looking to the future, avoid any tax liability for years to come, by reducing the number of claimed wage withholding tax exemptions (or paying quarterly taxes when due, if that applies to you). If it’s not possible to immediately reduce the exemptions totally, try reducing them a little at a time, so as to work the reduction in your bring home pay into your budget. Of course, avoiding tax liabilities in the first place, will also avoid the assessment of any penalties and interest.
Thanks for reading. Please note that I am licensed to practice law in Maryland and the District of Columbia. This topic was based off of general Federal and State laws of bankruptcy in and around the State of Maryland. Please note that every case is different and nothing herein is intended as specific legal advice. Please feel free to learn more about my practice at www.kelseylaw.net and to seek legal advice when you feel it necessary.
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