Tax Debts and Bankruptcy



I help people resolve their tax debts with the IRS and the states. In this post I will discuss what taxes cannot be discharged in a bankruptcy. While some taxes cannot be discharged in bankruptcy there are still ways to negotiate those tax payments with the IRS and the states.

Trust Fund Taxes like payroll taxes collected for the IRS are not dischargeable in a bankruptcy. Only income taxes are dischargeable in some cases.

Secured tax claims - where a tax lien has been filed are generally not dischargeable in a bankruptcy with some exceptions.

Unsecured/priority trust fund type or those that don't meet one of the three tests below are always non-dischargeable.

Unsecured/non-priority tax claims are sometimes dischargeable.

Which Income Taxes Cannot Be Discharged in Bankruptcy - Three Tests

There are several rules that apply to income taxes when it comes to bankruptcy. Following are some of the rules:

The Three Year Rule Test 

Tax returns last due with the last three years are not dischargeable. The last three years means they were due in the last years prior to the petition date. This is a look back rule that commences when the the return was last due including extensions. So if an extension to October 15th was filed and even though the return was filed before October 15th the last due date was October 15th even if filed earlier.

The Two Year Rule

The actual return must have been filed at least two years prior to the petition date. So even if the return was last due over three years ago but if it was not actually filed in the two years prior to the petition date it is still not dischargeable in a bankruptcy.

Taxpayer Must Self-File a Return. The return cannot be a Substitute For Return (SFR) filed by the IRS. If the debtor signs the SFR, that may constitute a "return".

To be considered a self-filed return it must meet other criteria as well.

  1. It must purport to be a return
  2. It must be executed under penalty of perjury
  3. It must contain sufficient data to allow calculation of tax
  4. It must represent an honest and reasonable attempt to satisfy the requirements of the tax laws.
Filing an inaccurate or incomplete return does not count as a self-filed return.

The 240 Day Rule

The tax in question must have been assessed more than 240 days prior to the bankruptcy (plus any period of time during which an offer in compromise was pending, plus 30 days).
New Assessments:
  • An Amended Return 
  • Exam Changes
Audit Risk: If taxes can still be assessed via audit, then, they will be priority/nondischargeable. A pending tax case is an example. 

Tax Liens
While an underlying tax debt may be dischargeable (meeting the rules) if the Federal Tax Lien remains and the debtor owns or later acquires lienable property the IRS will still be able to execute on its tax lien.

There is more to the issue of taxes dischargeable in bankruptcy but this gives you an idea of what can and cannot be discharged. If you have filed a bankruptcy and still have taxes that could not be discharged in the bankruptcy I can help you get those taxes resolved with the IRS and the states. If you have tax debts that you cannot pay at this time even after going through a bankruptcy now is the time to address those situations with the IRS and the states. Contact me today using my email address below to arrange a consultation via a phone, Zoom, or Skype call.



The CPA Superhero
jeff.jhtaxes@gmail.com





Posts:




Be careful when reading about tax law and its application, including my articles, because the wording and definitions are such a challenge and are influenced by writers perspective, specifically his own clients situations that he is mindful of and other situations the writer is not thinking of. The point is talk to your CPA about your situation and circumstances and don't rely on or make conclusions based on articles you read, including articles form irs.gov, because concepts and definitions are not very clear, and of course, they are subject to change. Now is the time to be having discussions about your situation and developing strategies for you and your business. Again, contact me using my information above to discuss your situation. I help business owners all over the U.S. and in foreign countries with their tax returns.

High Income Non-Filers Need to File ASAP - Field Collections Still Ongoing



Nonfilers

If you are a high-income nonfiler you need to file those back tax returns as soon as possible. The IRS put some collections efforts on hold during the pandemic but the pursuit of high-income non-filers was not put on hold. Revenue Officers can still pursue high-income non-filers.

Back in February I wrote about the IRS announcement that they intended to send agents to the homes of  high-income non-filers.  Given the tax gap and the collection potential of these cases, individuals who have not filed past tax returns have to read the writing on the wall and know the IRS is coming and probably sooner rather than later. To add fuel to this fire, the Treasury Inspector General for Tax Administration (TIGTA) recently reported "the IRS did not work 369,180 high-income nonfilers, with an estimated tax due of $20.8 billion. ... (and) the remaining 510,235 high-income nonfilers, totaling estimated tax due of $24.9 billion are sitting in one of the Collection functions's inventory streams..." 

Act Now

Needless to say there is much to be gained from pursuing these cases and you can imagine these nonfilers will soon be contacted.  If you are one of these the time to act is now. You want to get out ahead of this and avoid potential criminal action against you. The IRS recommends:

"Taxpayers having delinquent filing or payment obligations should consult a competent tax advisor before waiting to be contacted by an IRS revenue officer, Mamo said. "It is always worthwhile to take advantage of various methods of getting back into filing or payment compliance before being personally contacted by the IRS."

I help nonfilers to get into compliance with the IRS and avoid a visit to their home from and IRS Revenue Officer. One thing holding nonfilers back from filing their tax returns is fear of the amount they will owe and fear of not being able to pay the tax due. I also help taxpayers to negotiate payment arrangements with the IRS via Offers in Compromise, Installment Agreements, and other settlement avenues.

Being a nonfiler creates a burden for the nonfiler because they know this has to be dealt with and this can cause significant anxiety. The way to deal with it is to take action today. So contact me today using my email address below to arrange a consultation via a phone, Zoom, or Skype call.


The CPA Superhero
jeff.jhtaxes@gmail.com






Posts:




Be careful when reading about tax law and its application, including my articles, because the wording and definitions are such a challenge and are influenced by writers perspective, specifically his own clients situations that he is mindful of and other situations the writer is not thinking of. The point is talk to your CPA about your situation and circumstances and don't rely on or make conclusions based on articles you read, including articles form irs.gov, because concepts and definitions are not very clear, and of course, they are subject to change. Now is the time to be having discussions about your situation and developing strategies for you and your business. Again, contact me using my information above to discuss your situation. I help business owners all over the U.S. and in foreign countries with their tax returns.

The PPP Loan Forgiveness Application - What Will You Need To Fill It Out?


My first client completed his eight week covered period of his Payroll Protection Program (PPP) loan and I have worked through the forgiveness application. I read the instructions but to grasp the application and explain it I had to jump in and fill it out. I learned a lot along the way that I can share with you. The calculations are what they are but the needed information was something of a surprise as were the QuickBooks reports and their formats. I was able to download reports from QB in excel format and edit them to get the useful information in a format to do the calculations.

I will address what payroll information you need to complete the application but at the same time the application itself is a bit of a puzzle. The other expenses you will need to complete the application should be simple enough to get but the payroll data will be a test.

What payroll information do you need?


For the Covered Period you will need the following by employee:
Gross Pay
Hours
Weeks

In addition for the Average FTE and Salary/Hourly Wage Reduction calculations you will need the following by employee but for different time periods:
Gross Pay
Hours
Weeks
Time Periods for FTE
Time Period Election: Either 2/15/19 - 6/30-19 or 1/1/20 - 2/29/20
Assume you will need both.
2/15/20 - 4/26/20
as of 6/30/20
for the pay period that included 2/15/20

Time Periods for Salary/Hourly Wage Reduction
1/1/20 - 3/31/20
As of 2/15/20
between 2/15/20 - 4/26/20
as of 6/30/20

It is the same basic information by employee for several different time periods. The information is used to calculate average hours worked per week, gross pay per week, and the full time equivalency. The report I ran in QB gave me weekly payroll information that I had to sort by employee and get rid of information that was not needed. It took a while to do.  Hopefully if you have a payroll provider they can provide this information in a usable form. An excel spreadsheet is handy because the information can be manipulated to the needed format for making the calculations.

That Does Mean What You Think It Means

You would think the Salary/Hourly Wage Reduction would be a reduction simply for reducing hourly pay but no. But as I wrote about in a previous post, it is the difference between the hourly pay in the covered period and the base period by employee. If an employee's hourly wage during the covered period is less than 75% of what it was during the base period then the reduction is calculated by taking the difference between the hourly rate during the covered period and 75% of the hourly rate from the base period times the average number of hours worked per week during THE BASE PERIOD and multiply that by 8. So if you paid someone less per hour than you did during the base period by more than 25% and you paid them for fewer hours in the covered period then the reduction rate reflects both the wage differential and the difference in hours times 8. But that is if you elect the 8 week coverage period. If you elect the 24 week covered period then it is times 24.

Covered Period

By the way, from the application, it looks like the choice for the coverage period is either 8 weeks or 24 weeks. However, another of my clients shared with me that his bank said he could apply after 13 weeks. So that seems to be an important question that needs to be clarified. But it is also worth noting there may be variations in the interpretation of the Forgiveness Application between banks.

The Application Is Sort of A Puzzle

It was weird going through the application because it seems to tell you to go here and then go there and if something else go somewhere else. I got through it but it was like working a puzzle and I learned the hard way that I did not have all the needed information to complete the application and so I had to run more reports and get the data in the appropriate format. To save you that experience I have provided this outline above of the information you will need. When you get in to the application you will also see why I broke out the time periods need for the FTE and Salary/Hourly Wage Reduction separately. With the basic data by employee for the various time periods you will then need to figure out the different calculations.

Help

You will probably need someone who can generate the necessary payroll reports and calculate the numbers you need for the application. So consider who can run the reports and who is good at solving puzzles and has the patience to do so. If you would like my help contact me use my information below to email me to arrange an appointment for a consultation via a phone, Zoom, or Skype call.


jeff.jhtaxes@gmail.com
217-923-8007



Be careful when reading about tax law and its application, including my articles, because the wording and definitions are such a challenge and are influenced by writers perspective, specifically his own clients situations that he is mindful of and other situations the writer is not thinking of. The point is talk to your CPA about your situation and circumstances and don't rely on or make conclusions based on articles you read, including articles form irs.gov, because concepts and definitions are not very clear, and of course, they are subject to change. Now is the time to be having discussions about your situation and developing strategies for you and your business. Again, contact me using my information above to discuss your situation. I help business owners all over the U.S. and in foreign countries with their tax returns.

The IRS is Suspending Passports - IRS People First Initiative



For many tax non-filers that are overseas there is a real concern that their passport will be revoked or they will not be able to renew it. Due to the current COVID-19 pandemic the IRS announced some relief by means of the "People First Initiative". Basically the IRS announced it will suspend new certifications to the Department of State for taxpayers who are "seriously delinquent" "during this period". Here is the quote from the IRS News Release:

Passport Certifications to the State Department – IRS will suspend new certifications to the Department of State for taxpayers who are "seriously delinquent" during this period. These taxpayers are encouraged to submit a request for an Installment Agreement or, if applicable, an OIC during this period. Certification prevents taxpayers from receiving or renewing passports.
So this is good news for non-filers that need their passports. But don't procrastinate about your tax issues. First of all, notice that this is a suspense of filing new certifications to the State Department, so existing certifications are still in place and if your passport was revoked or you are not able to renew it, that still applies.

The other point is the reference to "during this period." At the beginning of the news release it mentioned the following:

The IRS will be temporarily modifying the following activities as soon as possible; the projected start date will be April 1 and the effort will initially run through July 15.
So you may have a reprieve but it is just temporary. That reprieve is scheduled to end on July 15, 2020. So the time to act is now to keep from having your passport revoked or suspended. Additionally if your passport has already been revoked or suspended you have a more urgent need to act so your travel restrictions can be lifted. Either way you need to get into compliance with filing your tax returns now.

I work with clients all over the work to file tax returns. Contact me today to arrange an appointment to discuss your situation. In addition to filing tax returns for clients, I also help clients make arrangements with the IRS to satisfy their payment obligations. So if you have not filed because of fear or what you might owe, I can help you both to file your returns and negotiate payments arrangements for you with the IRS. Notice above the IRS recommends the following:

These taxpayers are encouraged to submit a request for an Installment Agreement or, if applicable, an OIC during this period.
It is possible that you qualify for one of these payments arrangements but the only way to find out is to first file your delinquent tax returns. Also, if you are delinquent in making your tax payments I can help you make arrangements for these with the IRS.

So contact me today using my email address below to arrange a consultation via a phone, Zoom, or Skype call.


The CPA Superhero
jeff.jhtaxes@gmail.com






Posts:




Be careful when reading about tax law and its application, including my articles, because the wording and definitions are such a challenge and are influenced by writers perspective, specifically his own clients situations that he is mindful of and other situations the writer is not thinking of. The point is talk to your CPA about your situation and circumstances and don't rely on or make conclusions based on articles you read, including articles form irs.gov, because concepts and definitions are not very clear, and of course, they are subject to change. Now is the time to be having discussions about your situation and developing strategies for you and your business. Again, contact me using my information above to discuss your situation. I help business owners all over the U.S. and in foreign countries with their tax returns.

PPP Loan Forgiveness - The Big Surprise - The Salary/Hourly Wage Reduction


I worked through the PPP Loan Forgiveness Application for my first client that completed his eight week coverage period. I read the instructions but to grasp the application and explain it I had to jump in and fill it out. I learned a lot along the way that I can share with you. I am working on another post about what you will need to complete the application, but I need to talk to about The Big Surprise - The Salary/Hourly Wage Reduction.

That Doesn't Mean What You Think It Means

One of my new favorite expressions is "that doesn't mean what you think it means" and that certainly applies here. I thought The Salary/Hourly Wage Reduction had to do with how much less you paid someone on an hourly basis, but no it is much more. Looking at the instructions for the application on page 7 it takes you through this calculation, and it is a long winding road with a big surprise at the end.  How could a paycheck for a gross amount of about $50 result in a reduction of forgiveness of over $150? Well let me tell you.

Calculation of the Salary/Hourly Wage Reduction

Here is the calculation of the Salary/Hourly Wage Reduction. Start with the average hourly rate during the coverage period. Is that less than 75% of the average hourly rate during the base period? If so: multiply the the average hourly rate during the base period by .75 and subtract the average hourly rate during the coverage period. Take that number and multiply it by the average hours worked per week from the BASE PERIOD and multiply that by 8. The result is you get hit not just for the reduction in the hourly rate but also for the reduction in average hours worked per week and oh yeah also multiply that by the eight weeks of the coverage period. BAM! TAKE THAT.

It is interesting to note the calculation for The Salary/Hourly Wage Reduction is included in the original forgiveness application but I don't see it in the revised version just released today.


Election for a Longer Coverage Period

If the borrower elects a longer coverage period then he could be exposing his business to an even greater risk of reducing the forgiveness amount. Here is a quote from a Forbes article on this subject.

[Here’s another downside of the 24-week period. A longer covered period means a greater reduction in forgiveness if an employees salary or hourly rate are reduced during that time. After all, you’re multiplying the average salary or hourly rate reduction by 24 instead of 8.

BAM!

So a business owner may think he was being kind and paying someone who didn't even "show -up" and work for him but his forgiveness amount is reduced by over 3 times (or more if a longer coverage period is elected) what he paid the employee out of the kindness of his heart thinking it would be forgiven. Not only was it not forgiven but it reduced his forgiveness amount by 3 times (or more) what he paid the person.


Stay Tuned

That is the big surprise. My next post is about the surprise you need all this information and your accounting software does not include a useful report. No point and click and there is your information. Also, there are these somewhat obscure requirements for information from what seems like random periods. Oh yeah and most of it is by employee.

If you got a PPP loan for your business you will likely need help with the forgiveness application. I prepared one already for one of my clients and I have been asked to work on another next week. If you would like my help too use my information below to email me to arrange a consultation via a phone, Zoom, or Skype call.


jeff.jhtaxes@gmail.com
217-923-8007




Be careful when reading about tax law and its application, including my articles, because the wording and definitions are such a challenge and are influenced by writers perspective, specifically his own clients situations that he is mindful of and other situations the writer is not thinking of. The point is talk to your CPA about your situation and circumstances and don't rely on or make conclusions based on articles you read, including articles form irs.gov, because concepts and definitions are not very clear, and of course, they are subject to change. Now is the time to be having discussions about your situation and developing strategies for you and your business. Again, contact me using my information above to discuss your situation. I help business owners all over the U.S. and in foreign countries with their tax returns.

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