Sometimes I’m a Bankruptcy Attorney, but sometimes I’m just a Baltimore Tax Problem Solver!
One of the biggest expenses we face are taxes. Some people spend more on paying Income and Social Security/Medicare taxes than they do on housing. And sometimes those payments aren’t enough. Tax liability is not something many people have to worry about because taxes are deducted regularly from their paychecks and they file a normal return and get a modest refund. Others spend all year overpaying their taxes, giving the Government an interest-free loan, in order to get a larger refund. But sometimes decisions are made or situations change that upset that tax balance. Perhaps it was a withdrawal from a retirement account. The money that went in there tax free comes out and gets taxed. Another tax problem many of our clients have had over the years has been a massive boost to reported income due to charged off debt. The debt charge-off gets reported as income and taxed. Remember this last scenario, we’ll come back to that.
Tax problems? Sometimes the reason doesn’t matter.
Regardless of the reason you owe taxes, there are some important things to consider. Taxes are often thought to NOT be dischargeable in bankruptcy. This is untrue. Taxes can be both dischargeable and non-dischargeable, depending on when they were due, when you filed the return, and how long ago they were assessed. If you meet the criteria, your taxes can be discharged. It’s also important to realize that a payment plan does not increase the period of time you have to wait for taxes to become dischargeable, some things like an Offer In Compromise will extend your dischargeability deadline.
Filing extensions to file your taxes is important if you’re going to be late, but it can also push back the date on which a bankruptcy can help you discharge your taxes. Don’t get me wrong, an Offer in Compromise is a great tool to use and when appropriate, it absolutely should be used, but to use it as a delaying tactic is ineffectual. As a Baltimore Tax Problem Solver, Offer In Compromise is a tool I will absolutely use for the right client in the right situation.
Now let’s revisit that scenario of a debtor with charged off debts and a tax hit because of the additional reported income. If you fall behind on your bills, the original creditor can sometimes take a tax write-off on the bad debt. When they do this, they need to file a 1099-C with the IRS. They send you a copy and you’re required to file it with your taxes. For many people, this is income.
I have represented an individual in the past who had a 2nd mortgage charged off in this manner, to the tune of $20,000. She took it to a tax preparation store and was told she owed nearly $4,000 in taxes despite normally getting a $5,000 refund. She was already broke and had significantly more debt than she had assets. Her home had been foreclosed and she was living paycheck to paycheck. There was no way she could afford this $4,000.
We filed a bankruptcy, but did not seek to get the taxes discharged. It was too soon for that. Instead, I advised her to go see a real tax accountant and re-file that return with a declaration of insolvency. She wound up with a $2,000 refund after paying the accountant and my fee.
As a Baltimore Tax Problem Solver, I often find myself wishing that my clients would reach out to me sooner. Things tend to get messier when people wait to reach out for help. In the case of Overdue Taxes, that couldn’t be more true. Once the IRS files a tax lien, a person’s options for getting out of their tax situation becomes much more limited. Even dischargeable taxes would now need to be paid to some extent.
Don’t wait too long. Give us a call or click through for an appointment today!