All posts in Taxes

SFVBA Program Friday December 4, 2020 – “Late-Filed Returns and How To Discharge Them”

Email from Steve Fix:

Dear All:

Sorry for the late notice.  Bankruptcy Judge Robert Kwan (who worked at the Justice Department representing the IRS prior to taking the bench), John Tedford IV (at Danning Gill and who wrote a fascinating article on this issue for the ABI) and John Faucher (who spent a decade at the Justice Department on tax matters) have put together a good program.  It is called “Late-Filed Returns and How To Discharge Them”  The program looks at the problem – Section 523(a) – what constitutes a return, how BAPCAP has complicated the analysis, the IRS’ position on late filed returns, how to figure out if your client has the problem and what to do about it.  Of course the panel will also look at how the Franchise Tax Board and its position can complicate the analysis.

Why attend this program?  Easy.  The intersection of bankruptcy and tax is complicated.  This is probably the area of the highest legal malpractice for bankruptcy attorneys.  We have to know the subject well enough to at least know the issues, the questions, and hopefully a lot more.  For those of you who think the subject is dry, first, it is not but second, the program is only hour long.

I hope you can join us.  Here are the particulars: Read more…

Failure to notify the FTB that the IRS “adjusted” your taxes, makes the tax debt non-dischargeable

Berkovich v. State of California Franchise Tax Board (In re Berkovich), — B.R. —, 2020 WL 5910033 (9th Cir. BAP  Oct, 2020)

Issue:   Is the required “report” which must be filed with the FTB after the IRS adjusts a taxpayer’s return a “return” such that failing to file it renders the tax debt non-dischargeable?

Holding:   Yes.

Judge Maureen Tighe, Central District of California

Standard of review.  “We review de novo the bankruptcy court’s decision to grant or deny summary judgment.”

Faris, Lafferty, Spraker

Opinion by Robert Faris

The debtor here filed his personal tax returns with the FTB but failed to notify the FTB of adjustments made by the IRS.  The debtor argued “that the reports required under RTC section 18622(a) are not ‘returns,’ so his failure to file them did not render his tax debts nondischargeable.  He is wrong.”  The bankruptcy court ruled that the taxes for those years were not discharged.

The BAP affirmed.  “The only question on appeal is whether the report required by RTC section 18622(a) that Mr. Berkovich failed to file is a ‘a return, or equivalent report or notice’ within the meaning of § 523(a)(1)(B).”  The BAP said it was based on the language of the RTC code section.

Note:  This was a chapter 13.  The debt was treated in the plan as unsecured i.e., dischargeable.  The plan was confirmed, completed five years later and after that the FTB filed an adversary asking the court to rule that the tax was not discharged.

There is a difference between dischargeable taxes and priority taxes

We bankruptcy attorneys focus strongly on whether taxes are dischargeable: if you file a case too early, the debtor may go through bankruptcy and still owe taxes on the other end of the process. It’s usually a pretty easy malpractice case if an attorney misses this.

There are three mathematical tests for dischargeability of income tax: the tax return must have been due at least three years prior to the bankruptcy petition, the tax return must have been actually filed at least two years prior to the bankruptcy petition, and the tax must have been assessed at least 240 days prior to the bankruptcy petition. In addition, the tax assessment can’t be for a fraudulent tax return, and the debtor can’t have tried to evade the payment of the tax. Read more…

When the IRS violates the automatic stay

Email from Renay Rodriguez:

Taxpayers in bankruptcy cases who believe the IRS has violated the bankruptcy automatic stay or discharge injunction may file claims with the IRS for relief from the violations and for damages. The filing of a claim with the Service is a prerequisite for seeking damages and attorney fees under the Internal Revenue Code for violations of the automatic stay or discharge injunction. See 26 U.S.C. §§ 7430(a) and (b)(1), 7433(d)(1) and (e). Regulations provide that such claims should be sent in writing to the Chief, Local Insolvency Unit, for the judicial district in which the taxpayer filed the underlying bankruptcy case giving rise to the alleged violation. See 26 CFR § 301.7433-2(e). These bankruptcy related claims can be mailed to:

Internal Revenue Service
Chief, Local Insolvency Unit
Centralized Insolvency Operation
P.O. Box 7346
Philadelphia, PA 19101-7346

For further details regarding the procedures and requirements applicable to the filing of these types of bankruptcy related administrative claims for relief see 26 CFR § 301.7433-2 (Civil cause of action for violation of section 362 or 524 of the Bankruptcy Code), 26 CFR § 301.7430-1 (Exhaustion of administrative remedies), and 26 CFR § 301.7430–8 (Administrative costs incurred in damage actions for violations of section 362 or 524 of the Bankruptcy Code).

May the Light shine our way on.
R. Grace Rodriguez, Esq.

Pay off Taxes on a Credit Card Then File Bankruptcy To Wipe Out the Credit Card…will it work?

I paid my car registration fee on my credit card tonight and it got me thinking because I always with in places where they accept credit card payments.   A lot of government sites allow you to pay their debts with a credit card. Companies can also help you with your debts by providing you with payday loan consolidation service. Can you charge these on a credit card and then file bankruptcy to discharge the debt?  What about taxes?   Of course not.  Conceptually it makes sense but do you know the two Code sections that say this?  See below.

Thе IRS considers mаnу tуреѕ оf саnсеlеd dеbt tо be tаxаblе income. Fоr example, if уоu gеt a сrеdіt саrd іѕѕuеr to аgrее to саnсеl $5,000 оf your сrеdіt card dеbt, you might have to соunt that аmоunt аѕ taxable income whеn уоu fіlе уоur federal іnсоmе tax rеturn.

Hоwеvеr, debt саnсеlеd іn Chарtеr 11 bаnkruрtсу іѕ nоt соnѕіdеrеd tаxаblе іnсоmе.

Thаt mеаnѕ if уоu оwеd taxes and gоt thеm canceled аѕ part оf a bаnkruрtсу рrосееdіng, уоu will nоt hаvе tо rероrt thаt аmоunt — or аnу оf your other dеbt fоrgіvеn bу thе bаnkruрtсу — аѕ tаxаblе іnсоmе on a future tаx return. But уоu may have to fіlе a form (Form 982) wіth the IRS tо verify thаt the debt was dіѕсhаrgеd through bankruptcy аnd thеrеfоrе іѕn’t tаxаblе іnсоmе.

Read more…

Personal Liability for Business Sales Tax – What Was The Point Of Having Corporation?

You can be held personally liable for the unpaid sales or use tax of your corporate business.   Bankruptcy does not solve this.

For instance, you own a retail business and get audited by the state.  The Board of Equalization says “your business owes $100,000 in sales tax that you failed to send to us.”  You decide to close the business and walk away because you cannot pay that.  The state can assess that $100,000 liability against you personally!  You will then complain to me “…but I had a corporation, isn’t a corporation supposed to protect me?  what was the point of having a corporation?!”

Then you calm down and say “….ok, I will file chapter 7 bankruptcy.”  The state can hold the “responsible person” personally liable.  The definition of “responsible person” is broad and can include the business’s CPA!  The standard is if the “responsible person” willfully fails to pay the tax. If you have a business financial consultant that would take care of the taxes such as with you won’t have to stress about tax liability.

Let’s take a look at the law and break it down….

Here is the California law on this… (I parsed it out). Read more…

Debtor’s Passport Can Be Revoked/Not Renewed If They Owe $51k+ Taxes to IRS

How many clients do you have that owe the IRS more than $51k in back-taxes?  If so, the State Department can revoke your passport entirely or decline to renew until taxes are paid off or you enter into a repayment plan.  See IRS Notice Here

Would that be a stay violation?  Hmmm, maybe not under 362(b)(9) and (26)?  Perhaps it can be argued that it is not an act to collect against the debtor at all?  hmmm I’ll punt on this!

Deadline to File Petition for Review with Tax Court is Jurisdictional says the 9th Circuit

Summary written by Pardis Akhavan, associate at Resnik Hayes Moradi LLP

Duggan v. Commissioner of IRS, 879 F.3d 1029 (9th Cir 2018)      

Issue: Is the thirty-day deadline to file a petition for review of IRS’s determination with the Tax Court jurisdictional or can the deadline be tolled equitably?

Holding: No, § 6330(d)(1) conditions the Tax Court’s jurisdiction on timely filing of a petition for review.

The IRS mailed two Notices of Determination to taxpayer which proposed collection of unpaid income taxes.  Both notices informed the taxpayer that he could dispute the IRS’s determination by “fil[ing] a petition with the United States Tax Court within a 30-day period beginning the day after the date of this letter.”  Thirty one days after receipt of the Notice of Determinations the taxpayer mailed a petition for review to the Tax Court.  The IRS Commissioner moved to dismiss the petition for lack of jurisdiction.  The Tax Court agreed and granted the motion dismissing the petition on jurisdictional grounds. Read more…

Tricky Tax Issues / You have an extra day to file federal tax returns

If a client of mine wants to file for bankruptcy, for the purpose of discharging income tax debt, I will wait as long as I can to be sure the three year rule is satisfied. I will make sure there are no prior bankruptcies, and I will make sure no extension was requested.

Most of the time, our clients cannot wait, and will want the bankruptcy filed asap. So when are those taxes dischargeable for this year?

I thought to myself, simple:

April 15 is a Sunday.
April 16 is Emancipation Day.

So, taxes are due on April 17!

WRONG Read more…

Nice Summary of new Consumer Tax Issues from Cathy Moran

Yikes!  Cathy’s article is here. 

“Under the new tax law,  any damage award a consumer recovers stands to go in large part to the IRS.

So even if you are successful in court in vindicating your legal rights, the expenses of getting the award aren’t deductible from the gross award. The taxing authorities end up getting a large hunk of the total recovery.

Welcome to tax ‘reform.’”