Tax problems are one of the main reasons that people file bankruptcy. There are a variety of tax issues that you may confront. A bankruptcy lawyer experienced in dealing with tax matters is vital to a successful bankruptcy whether you are a wage earner, independent contractor, or business owner.
A successful bankruptcy tax strategy will depend on a number of issues:
- Should you try to work something out on your own?
- Do you have unfiled returns?
- What tax years do you owe for?
- Do you owe income tax?
- Do you owe trust fund taxes?
- Are you self-employed?
- Where are you in the tax collection process?
- Are you dealing with the IRS, the WA DOR, or both?
- What other debts do you have?
Based on the answers to these questions, I can help you find a way to either work with the tax authorities or to file bankruptcy and discharge your taxes.
Don’t Contact the IRS or the DOR Without Help
There are a variety of programs in place to help you get caught up on your taxes, and the revenue agent may have sounded friendly on the phone. That doesn’t mean you should try to negotiate on your own. Everything you say to the IRS or the DOR can be used against you. No matter how friendly or accommodating they may seem on the phone, their job is to get the most money out of you as possible.
An attorney can provide a buffer between you and the tax collector. Additionally, an attorney knows what to say and what not to say to a tax collector. Finally, I can help you evaluate any offer from a tax collector in relation to your entire financial situation.
Unfiled Tax Returns
You must get all of your unfiled tax returns filed.
- The Internal Revenue Service can criminally prosecute you for failing to file tax returns. However, you cannot be prosecuted for failing to pay taxes, unless you committed fraud. The best thing to do is promptly file your tax returns and make sure that they are accurate.
- You can’t get a bankruptcy discharge for a year, if you haven’t filed that year’s return.
- You have to wait an additional 240 days after you file a tax return, if you want that tax debt to be included in the discharge.
What Years Do You Owe Tax For
In order to discharge a tax, you have to wait three years from when the tax return was due. The three years runs from April 15, unless you got an extension October 15. So for example:
- If the tax return was due on April 15, 2010; then those taxes become dischargeable in bankruptcy on April 16, 2013.
- If you got an extension to October 15, 2010, then the taxes become dischargeable on October 16, 2013.
Do You Owe Income Tax or Trust Fund Tax
Everyone pays income tax. Income taxes are dischargeable three years after the date the return was due. Trust fund taxes are withholdings that employers are required to make for employee’s taxes, Social Security, and Medicare. Trust fund taxes cannot be discharged in bankruptcy.
If you owe trust fund taxes, then we will need to work with either the Internal Revenue Service or the State to get them repaid.
When you are self employed, your taxes are more complicated. This is because you have deductions from your gross income for all of your business expenses. Part of the repayment process is making sure that you claimed all of the allowed expenses and claimed all of your income.
If you get audited as part of your tax debt resolution process, I can work with you to show the IRS that your expenses and income are correct.
Where Are You In the Tax Collection Process
That stage of your case in the collection process is important. The IRS in particular has a very well defined collection process. Your options will vary depending on whether you are at the beginning, middle, or end of the process.
For example, the IRS usually sends a few initial letters inquiring about the status of a return, adjusting the amount due, and asking you to contact them about payment arrangements. That early stage is the easiest to deal with, especially as compared to the end stages when you start getting notices of intent to levy.
Which Tax Agencies Are You Dealing With: the IRS, WA DOR, or Both?
Strategies differ depending on which tax agencies you own and whether you owe multiple agencies. I know it sounds surprising, but the Internal Revenue Service is often the easiest tax creditor to negotiate with. The IRS has a number of programs for people who are behind on their taxes. If the IRS believes that you intend to repay them, then I can work with the revenue agent to find a repayment program for you.
The Washington State Department of Revenue can be harder to deal with than the IRS. This is because the IRS is much larger and works with a greater pool of revenue. By contrast the WA DOR is fairly small. The IRS has well defined programs for dealing with back taxes, whereas the WA DOR process is less formal and depends much more on the revenue agent who has your case.
What Other Debts Do You Have?
Your overall debts make a difference in how we approach your tax debts and time a possible bankruptcy. Depending on your situation, it may make the most sense to wait to file bankruptcy so that more debts are discharged. If, on the other hand, you have many other creditors who are aggressively pursuing collection, you may need to file bankruptcy and then negotiate with your tax creditors after you get a discharge.