Can a Late Tax Return be Discharged in Bankruptcy?

Late Filed Returns and Discharging Back Taxes

A State of Uncertainty 

On December 29, 2014, the Court of Appeals for the Tenth Circuit, (In re Mallo, 2014 WL 7360130 (10th Cir. 2014)), followed the Fifth Circuit (In re McCoy, (CA 5 2012) 666 F.3d 924) and several other tax bankruptcy court cases which held that late-filed tax returns cannot be discharged in bankruptcy.  Unfortunately, this draconian result known as the One-Day-Late Rule could preclude the taxpayer’s goal of eliminating back taxes in bankruptcy and obtaining a fresh start.

How do I eliminate taxes in bankruptcy? 

In bankruptcy, back taxes are either secured or unsecured claims.  If the IRS or state taxing authority files a tax lien, then the tax claim is secured and paid first from the taxpayer’s assets.  If the tax claim is unsecured, then its treatment will be contingent upon whether the IRS’s claim is classified as a priority or a general claim.

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Why is everything taking so long at the IRS? The 2015 Budget

IRS 2015 BudgetThrough the 2015 Consolidated Further Continuing Appropriations Act, Congress cut the IRS’s budget for the fifth consecutive year.  Congress reduced the IRS budget by $346 million from the 2014 fiscal budget which was $526 million below the IRS’s 2013 funding level.  The IRS budget is cause for concern when the tax season starts on January 20, 2015.

Where is my tax refund?  I cannot get through to the IRS.

IRS Commissioner, John Koskinen estimated that approximately 50% of calls will be answered during the 2015 filing season.  Koskinen stated that “those who do get through could easily wait 30 minutes more.”

In June 2013, Nina Olsen, head of the Taxpayer Advocate, an independent unit of the IRS whose mission is to protect the taxpayer said “the IRS is an institution in crisis”. . . as a consequence of this crisis, the IRS gives limited consideration to taxpayer rights or fundamental tax administration principles as it struggles to get its job done.”  As a tax attorney whose focus is exclusively on taxpayer representation, I would agree.  The IRS is not functioning well.  Some of the problems that I am encountering in my tax practice are as follows:

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The IRS Abused Its Discretion in Requiring that a Federal Tax Lien Should be Filed

Notice of Tax LienIn a recent US Tax Court decision, Budish v. IRS, T.C. Memo. 2014-239, the Court held that a settlement officer erroneously concluded that the Internal Revenue Manual (“IRM”), an IRS employee handbook, required the filing of a notice of federal tax lien as a condition to execute an IRS installment agreement.  This is an important taxpayer victory because of the difficulty involved in avoiding an IRS tax lien.  It further emphasizes the importance of timely filing an appeals hearing when the IRS threatens to levy.

The IRS Collections Unit Threatens a Tax Levy

In Budish, the taxpayer owed $205,000 in back taxes.  In an effort to collect the back taxes owed, the IRS collection unit threatened to levy the taxpayer’s property or right to future property.  The taxpayer filed for a Collection Due Process Hearing (“CDP”) which afforded the taxpayer the right to appeal the tax levy and provide US Tax Court review if the taxpayer and appeals could not negotiate a tax resolution.

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IRS Overpayments and Underpayments: 2015 Interest Rates

2015-interest-ratesMistakenly, many believe that filing a tax extension is an extension of time to pay your taxes.  While a tax extension provides an extension to file your tax return, it does not provide an extension of time to pay taxes owed.

The federal income tax is a pay-as-you-go tax system.  If you’re an employee, then your employer will withhold income tax during each pay period in your name and social security number.  If you are self-employed, then you would make estimated tax payments throughout the year based on earnings and, generally speaking, have to pay self-employment tax.  If you are an employer, then you may have to make federal tax deposits for payroll taxes throughout the year as you are paying your employees.

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IRS Seizes Small Business Owner’s Accounts

irs seizes accountsThrough a practice known as civil forfeiture, the IRS can seize property that it believes is tied to a crime even if no criminal charges are filed.  The problem is that the IRS has been abusing its power by seizing bank accounts where there is no indication of a crime committed.

The New York Times reported that the IRS has been seizing bank accounts of small business owners and individuals who deposit cash transactions in less than $10,000 increments.  The Bank Secrecy Act requires a bank to report to the government when an individual or business deposits more than $10,000 in cash.  The Act was designed to catch drug traffickers, racketeers, and terrorists by tracking their cash.  The Act was not designed to catch people and businesses who are not trying to break the law.

Structuring, also known as Smurfing, is a crime whereby a person intentionally tries to avoid the banks reporting of income by depositing the cash in increments smaller than $10,000.  The problem is there could be legitimate reasons for businesses and individuals to deposit less than $10,000 increments.  Unfortunately, the IRS has seized peoples bank accounts who are innocent.  Owners are then left to either try to prove their innocence to win back funds, or lose the money that’s been taken.

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Real Housewives of New Jersey Star Joe Giudice Sentenced To Over 3 Years In Prison

joe giudice tax fraudReality television star Giuseppe “Joe” Giudice, 43, of The Real Housewives of New Jersey was sentenced to 3 years and 5 months in prison on Thursday, October 2, according to NorthJersey.com. The verdict comes after Giudice and his wife Teresa, 42, pleaded guilty in March to federal fraud charges involving bankruptcy fraud, wire fraud, conspiracy to commit mail fraud and failure to pay taxes. Teresa was sentenced to 15 months in prison and two years probation compared to Joe’s 41 months, but each were ordered to pay $414,588 in restitution in addition to their jail sentences.

“Both Giudices pleaded guilty to conspiracy to commit mail and wire fraud and three types of bankruptcy fraud,” the article said. “Joe also pleaded guilty to failing to file a tax return for 2004, though he acknowledged that he didn’t file taxes on income of approximately $1 million from 2004 to 2008.”

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Mike ‘The Situation’ Sorrentino and Brother Marc Sorrentino Face IRS Tax Fraud Case

mike the situation tax fraudReality television personality from the Jersey Shore, Mike “The Situation” Sorrentino and his brother, Marc Sorrentino, are under arrest and are facing tax fraud charges because they did not properly pay income taxes on $8.9 million.  The $8.9 million was received from Mike’s promotional activities after he gained fame on the MTV reality series.

Marc Sorrentino, who is also Mike’s manager, and “The Situation” are being charged with filing false tax returns for the tax years 2010, 2011 and 2012. Additionally, Mike faces an added charge of failing to file his tax return for the year of 2011. The brothers also both face charges of conspiracy to defraud the United States government.

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Owe New Jersey Back Taxes? The NJ Division of Taxation Offers a Way to Resolve Unpaid Tax Debt with No Penalties

NJ Back Taxes ResolutionThe New Jersey Division of Taxation has offered businesses and individuals a way to resolve back taxes from 2005 through 2013 at a reduced cost. The details of the plan are as follows:

  • Most of the penalties that were assessed to your account will be reduced to zero.  The Amnesty Penalty (5%) imposed on taxes due on or after 1/1/2002 and before 2/1/2009 is still applicable.
  • Interest will be calculated only on the tax and the reduced penalties.
  • The 10% recovery fee which is imposed on each tax liability that is forwarded to NJ’s outsourced, collection unit, Pioneer, is waived.
  • The 10% cost of collection fee charged for filing a Certificate of Debt (Judgment) may be eliminated.

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Be Careful of IRS Impersonation Phone Scam - Do Not Become a Victim

IRS Phone ScamOver the past few months, I have been receiving calls from clients and prospects regarding an IRS phone scam.  The callers have informed me that they received a call from someone at the IRS threatening to throw them in jail, revoke their driver’s license, or seize all of their belongings if they do not pay over a sum of money.  The Treasury Inspector General for Taxpayer Administration (TIGTA) is aware of this scam and has issued a warning to taxpayers.

The callers claim to be from the Internal Revenue Service tell intended victims they owe back taxes and must pay by wire transfer or a pre-paid debit card.  Dealing with the IRS on a day to day basis, I can tell you this is not how the IRS contacts people who owe money.  Generally, the IRS will notify people with a series of letters, not by phone, regarding unpaid taxes.  The IRS will never ask for payment by wire transfer or a pre-paid debit card.

TIGTA advised that if you receive a threatening call from someone claiming to be from the IRS, then hang up the phone and call the IRS directly at (800) 829-1040.  A list of IRS contact numbers is on the following website: http://www.irs.gov/uac/Telephone-Assistance.  When you speak to the IRS, inform them of the phone call and ask if your account is in good standing.

If you have been a victim of this scam, then you should, at a minimum, complete the following steps:

  1. File a local police report
  2. Go to the IRS Treasury Inspector website  (http://www.treasury.gov/tigta/contact_report_scam.shtml)Complete the form and retain a copy of the pin number;
  3. Contact the Federal Trade Commission (use their “FTC Complaint Assistant” at FTC.gov. and add “IRS Telephone Scam” to the comments of your complaint in the “Other” Section. (https://www.ftccomplaintassistant.gov/#crnt&panel1-1) ;
  4. Contact the FBI
  5. Contact the Attorney General’s Office in the state you reside.

If you have been a victim of the IRS impersonation scam, IRS identity theft, or another tax scam, then contact the Law Offices of Todd S. Unger, Esq. for help.

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The IRS May Issue Notice of Levy While Installment Offer Pending

In a recent US Tax Court decision, Renald Eichler v. IRS (“Eichler”), Docket Number 725-12L,  the Tax Court affirmed that IRC 6331(k)(2) does not preclude the IRS from issuing the Final Notice of Intent to Levy after the taxpayer submitted an installment agreement request.  The Tax Court further held that the IRS did not abuse its discretion under the Internal Revenue Manual, an IRS employee handbook, when it decided to sustain the Final Notice of Intent to Levy.

The Taxpayer’s Partial Payment Proposal to Resolve a Payroll Tax Matter Did Not Stop the IRS Threat to Levy

In Eichler, the IRS utilized IRC 6672 to assess the Trust Fund Recovery Penalty (TFRP).  The TFRP is a weapon the IRS uses to collect delinquent payroll taxes from responsible and willful individuals who do not remit an employee’s wages (income tax, social security, and Medicare taxes).  The IRS found that the taxpayer was a responsible and willful party and assessed $189,374 in back payroll taxes.

The taxpayer proposed a partial payment installment agreement (“PPIA”) of $350 per month to resolve the delinquent payroll taxes.  A PPIA is a proposal to pay less than what is owed through a payment plan.  If the IRS approves the partial pay installment agreement, it will monitor the taxpayer’s ability to pay throughout the 10 year collection statute.  Generally speaking, the IRS has 10 years to collect back taxes unless it seeks a judgment which can extend the statute based on a time prescribed by state law.

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