FILED LIENS, SECRET LIENS, ERISA PENSION PLANS AND BANKRUPTCY

FILED LIENS, SECRET LIENS, ERISA PENSION PLANS AND BANKRUPTCY

Most bankruptcy attorneys know that federal income taxes can be discharged in bankruptcy.  Simply stated, income taxes are dischargeable if (1) the original due date of the return plus extensions is more than three years before the bankruptcy filing date, (2) the return has been on file for at least 2 years on the day the bankruptcy petition is filed, and (3) the tax has been assessed for at least 240 days on the day the bankruptcy petition is filed.  Knowing the rules for discharging income taxes in bankruptcy is certainly important, but it’s not the whole story.  You also need to know what the discharge means for the bankruptcy debtor

I. What Is a Discharge?

Dischargeable debts are discharged as of the date the bankruptcy petition is filed.  To confirm the discharge, the Court enters an order of discharge about 120 days after the bankruptcy petition is filed.  As explained in 11 U.S.C. §524(a)(2), the discharge is a permanent court injunction which prevents all creditors (including the IRS) from taking any action to collect, recover or offset any discharged debt as a personal liability of the debtor.  In other words, the debtor is no longer personally liable for any discharged debt, including discharged taxes.

II.  In Personam vs. In Rem Liability

The debtor’s personal liability which is discharged in bankruptcy is often referred to by the legal name in personam.  If the debtor is personally liable for a debt that is legally enforceable in Oklahoma, the creditor can collect the debt even if the debtor moves to a different state.  The debtor’s move may make the creditor’s job harder, but it doesn’t affect whether the debt is enforceable.  When the debtor receives a discharge in bankruptcy, the debtor is no longer personally liable for most debts.  The discharge means that the creditor can no longer collect the debt from the debtor.  However, the in personam discharge does not necessarily mean that the debt is uncollectible.  The creditor may still be able to collect the debt from the assets of the debtor.  This is known as in rem liability.

In personam liability means that the debtor is personally liable for the debt.  The creditor can collect an in personam debt from any assets the debtor owns that are not exempt under state law. In contrast, in rem liability means that the creditor has a legal claim or lien against asset(s) owned by the debtor.  The lien may be limited to a specific asset owned by the debtor such as a car loan or a home mortgage, or it may apply to all assets owned by the debtor such as a federal tax lien or a federal restitution claim.  The distinction between in personam and in rem liability is important because in rem liability is not discharged in bankruptcy.  The United States Supreme Court explained this in Johnson v. Home State Bank, 501 U.S. 78 (1991): “Thus a bankruptcy discharge extinguishes only one mode of enforcing a claim–an in personam action–while leaving intact another–an in rem action.”  The reason only in personam liability is discharged in bankruptcy is obvious.  If a debtor could discharge both in personam and in rem liability in bankruptcy, a debtor could purchase a $1,000,000.00 home on day one, file bankruptcy on day two and live in the mansion for the rest of his life without paying for it.

III.  Federal Tax Liens and Bankruptcy

Section 6321 of the Internal Revenue Code (“IRC”) creates a lien in favor of the United States as follows:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

The IRC §6321 lien (sometimes referred to as the “inchoate lien” or the “secret lien”) comes into existence as soon as the tax is assessed and notice and demand for payment has been mailed to the taxpayer.  The IRC §6321 lien is effective as against the taxpayer and his/her property even though it is not publicly recorded.  However, IRS is authorized under IRC §6323 to record its lien by filing a Notice of Federal Tax Lien (“NFTL”) in the local county land records office (sometimes call the “Recorder’s Office”) and/or the centralized UCC records.  IRS records its lien to obtain priority over potential creditors who have no knowledge that the debtor owes taxes.

  1. Assets Excluded from the Bankruptcy Estate. The day the debtor files bankruptcy, an estate is created which consists of all interests of any kind the debtor owns in real or personal property.  The bankruptcy estate includes virtually all the assets the debtor owns before filing, with one important exception.  Section 541(c)(2) of the bankruptcy code excludes ERISA qualified pension plans.  The debtor’s interest in an ERISA qualified pension account never becomes property of the estate.  See, Patterson v. Shumate, 504 U.S. 753 (1992).
  2. Exempt Assets. Exempt assets are included in the bankruptcy estate, but these assets are exempt from creditors in bankruptcy.  The exemptions differ from state to state, but exempt assets typically include some portion or all of the value of the debtor’s principal residence, household goods, furnishings and appliances and non-ERISA qualified retirement accounts such as IRAs, SEPP accounts and some 401(k) accounts.
  3. Effect of Tax Discharge When the NFTL is Recorded Before Filing Bankruptcy. If the debtor’s income taxes are dischargeable, the debtor is no longer personally liable for the tax debts.  Even if IRS recorded a NFTL before the bankruptcy was filed, IRS can no longer levy any property the debtor acquires after the bankruptcy is filed, such as wages and business income. However, when a NFTL is properly recorded before the bankruptcy is filed, the IRS lien survives the bankruptcy and continues as a lien against all assets the debtor owned prior to filing bankruptcy, regardless of whether those assets are exempt.  A properly recorded NFTL continues after bankruptcy as a lien on all exempt assets owned on the day the bankruptcy is filed, including pension plans, whether ERISA qualified or not.
  4. Effect of Tax Discharge When NFTL is Not Recorded. If IRS doesn’t record a NFTL before the debtor discharges the tax debt by filing bankruptcy, the IRS lien will be extinguished against all property of the bankruptcy estate, whether the property is exempt or not.  The unrecorded statutory lien under IRC §6321 is extinguished by Bankruptcy Code §522(c)(2)(B).  It is important to note, however, that bankruptcy only affects property of the bankruptcy estate.  Bankruptcy has no effect on excluded assets such as ERISA qualified pensions.
  5. What Happens If the Debtor Files Bankruptcy With an ERISA Qualified Plan?

Assume the debtor has $250,000.00 in an ERISA qualified pension plan and $100,000.00 in dischargeable federal income taxes on the day the debtor files bankruptcy.  Prior to filing bankruptcy, IRS has a statutory lien under IRC §6321.  Since ERISA qualified plans are not property of the debtor’s bankruptcy estate, and since IRS’s statutory lien survives the bankruptcy, IRS can (and probably will) assert its lien against the pension plan.  The key to this analysis is that the ERISA qualified plan is not property of the estate.  It’s not an exempt asset of the estate, because it never becomes property of the estate. Although IRS can no longer collect the debt personally from the debtor’s other assets, IRS can liquidate the debtor’s pension plan to get the money.  See, United States v. Snyder, 343 F. 3d 1171 (9th Cir. 2003); Chief Counsel Memo. No. 200634012 (08/25/06).

IV.  Conclusion

ERISA qualified pension plans are not property of the bankruptcy estate.  The IRS’s secret lien under IRC §6321 attaches to the pension account, and even though the income tax debt is discharged in bankruptcy, IRS can still levy on the excluded pension plan assets.

 

Posted on March 1, 2017.

Can IRS Levy 100% of a Taxpayer’s Social Security?

Can IRS Levy 100% of a Taxpayer’s Social Security?

I’m sure some of you have experienced this:

  • You or a friend or loved one receives a notice from the IRS that IRS has issued a levy to the Social Security Administration;
  • The notice (either a CP91 or a CP298) states that IRS is authorized under Internal Revenue Code (“IRC”) §6331(h) to levy up to 15% of a taxpayer’s Social Security benefit payments;
  • The notice further states that the taxpayer can avoid the Social Security levy by (1) full paying the liability within 30 days after the notice, or by (2) contacting IRS and presenting income and expense information showing that the Social Security levy creates an undue financial hardship and should be released.

At a recent taxpayer defense conference I attended, a few of the tax professionals in attendance reported that they have represented clients who have had far more than 15% of their Social Security benefit payments levied.  A couple of professionals even reported that IRS had levied 100% of the client’s Social Security benefit payments.  OUCH!

Everyone in attendance at the Conference agreed that a 100% Social Security levy is unfair, but we disagreed about whether it’s legal.  After all, IRC §6331(h) states:

If the Secretary approves a levy under [IRC §6331(h)], the effect of such levy on specified payments to or received by a taxpayer shall be continuous from the date such levy is first made until such levy is released. Notwithstanding section 6334, such continuous levy shall attach to up to 15 percent of any specified payment due to the taxpayer.

Social Security benefit payments qualify as “specified payments”, so if the IRS levy is approved under IRC §6331(h), isn’t IRS limited to taking no more than 15% of each Social Security payment?  Yes, there is no question that a §6331(h) Social Security levy is statutorily limited to 15% of the payment.  Well, if that’s true, how can IRS legally levy more than 15% of my client’s Social Security benefit payments?

Section 6331(a) of the Internal Revenue Code, the general levy section, authorizes IRS to issue levies as follows:

If any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary to collect such tax (and such further sum as shall be sufficient to cover the expenses of the levy) by levy upon all property and rights to property (except such property as is exempt under section 6334) belonging to such person or on which there is a lien provided in this chapter for the payment of such tax. Levy may be made upon the accrued salary or wages of any officer, employee, or elected official, of the United States, the District of Columbia, or any agency or instrumentality of the United States or the District of Columbia, by serving a notice of levy on the employer (as defined in section 3401(d)) of such officer, employee, or elected official. If the Secretary makes a finding that the collection of such tax is in jeopardy, notice and demand for immediate payment of such tax may be made by the Secretary and, upon failure or refusal to pay such tax, collection thereof by levy shall be lawful without regard to the 10-day period provided in this section.

Many of you reading this have experienced or at least heard of a levy being served on the taxpayer’s bank.  A bank levy, which is issued under the authority of IRC §6331(a), is a “one-time-hitter”, meaning that on the date the levy is received by the bank, the bank will pay IRS the balance of the bank account or the entire tax balance due, whichever is less.  Deposits made into the bank account on the day after the levy is received by the bank are not affected.  A §6331(a) is also issued to collect money in a brokerage account or an IRA and also to collect payments due to an independent contractor for work performed.

When the taxpayer receives Social Security and owes federal taxes, IRS typically uses a §6331(h) levy to collect the tax, and limits its collection to no more than 15%.  But §6331(h) is not the only way IRS can collect against Social Security.  Occasionally, IRS will levy Social Security pursuant to §6331(a), and if they do that, they are legally authorized to collect up to 100% of each and every Social Security payment until the entire tax debt, including penalties and interest, is paid in full.  A 100% levy against Social Security is punitive, harsh, unfair, Draconian and . . . entirely legal!

Several federal court cases have held that IRS is not statutorily limited to collecting only 15% of a taxpayer’ Social Security payments.  If the IRS levy is issued pursuant to IRC §6331(a), it reaches 100% of each Social Security payment and continues until the entire assessed balance of tax penalty and interest is collected.

In Hines v. United States, 658 F. Supp. 2d 139 (DDC 2009), the plaintiff (“Hines”) owed taxes for 1996 through 2001 and also owed for 2003.  IRS was levying the Hines’ income, including 100% of each of Hines’ monthly Social Security benefit payments.  Hines sued IRS in the Washington D.C. federal court and alleged, among other things, that IRS was limited by IRC §6331(h) to collecting only 15% of Hines’ monthly Social Security payments.  IRS answered Hines’ allegations, counterclaimed to reduce the tax assessment to a judgment, and quickly filed a motion for summary judgment on all outstanding issues.

In his response to IRS’s Motion for Summary Judgment, Hines argued that IRS’s levy on his Social Security benefits violated the 15% cap on “continuous” levies against “specified payments” imposed by IRC §6331(h).  IRS countered Hines’ argument by stating that the levy it issued against Hines was not a “continuous levy”, and therefore it was not limited to 15% of each payment.

In its opinion, the Court discussed the history of the continuous wage levy, the 15% limitation on §6331(h) levies, and the fact that IRS has the discretion whether to levy Social Security under §6331(h) subject to the 15% cap or under §6331(a) which is not subject to any cap.  The Court also held that IRS has the authority under §6331(a) to levy 100% of both current and all future Social Security payments, because:

  • Social Security benefits are vested in the taxpayer and create a current obligation for the United States;
  • Social Security benefits are “fixed” because they are based on the beneficiary’s average lifetime employment earnings; and,
  • Social Security benefits are “determinable” and can be calculated using the statutory benefits formula set forth in Title 42 of the United States Code (“USC”) at §402 et seq.

Having found that Hines’ Social Security payments are fixed and determinable obligations, the Court held that:  “The Social Security Administration’s ongoing payment of a specific amount of retirement benefits to plaintiff every month therefore was an ‘obligation existing at the time’ the levies attached under 26 U.S.C. §6331(b).”

After concluding that IRS was entitled to 100% of Hines’ Social Security, the Court pounded the final nail in Hines’ coffin by granting IRS summary judgment on its counterclaim reducing Hines’ tax assessment to a judgment which extended the 10-year statute of limitations on collection for an additional 20 years.

IRS frequently levies on Social Security benefits, but Social Security levies are almost always sought pursuant to IRC §6331(h) and limited to 15%.  One hundred percent Social Security levies pursuant to IRC §6331(a) are rare.  In fact, many of the attendees at the taxpayer defense conference had represented taxpayers for many years and never seen one.  But the fact that they are rare doesn’t mean they are unlawful.  Just ask Mr. Hines.  Unfortunately, the answer to the title question of this article is “Yes!”

Posted on February 7, 2017

JUST POSTED: MY SERIES OF ARTICLES ON THE BANKRUPTCY DISCHARGE WAR

I just finished my third article in a series titled “THE BANKRUPTCY DISCHARGE WAR”.  If you’re interested in what’s happening in this rapidly changing area of the law, I invite you to read my articles.  I’ve spent 25 years of my career studying the ins and outs of discharging taxes in bankruptcy.  If you have tax debts that you think may be dischargeable, please call me at 918-743-2000. Let’s discuss whether you’re entitled to relief from your tax debts in bankruptcy.

the-bankruptcy-discharge-war-part-i  This article was written after the Bankruptcy Code was radically amended by the Banruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 but before the federal courts began interpreting BAPCPA’s tax discharge provisions.

the-bankruptcy-discharge-war-part-ii  This article was written after the United States Court of Appeals for the Fifth Circuit “judicially legislated” a long-standing tax discharge provision out of the Bankruptcy Code by deciding that a late-filed return – whether it’s one day late or ten years late –  is NOT a return for purposes of bankruptcy.  You thought legislation was left to the legislature, didn’t you?  Not true.

the-bankruptcy-discharge-war-part-iii  This article was written after two more Circuit Courts (First Circuit and Tenth Circuit) followed the lead of the Fifth Circuit and legislated into law the “one-day-late rule, but also after the 11th Circuit and the 9th Circuit refused to adopt the one-day-late rule.

One can only hope that the United States Supreme Court will step in at some point and straighten out this mess.

IMPORTANT UPDATE ON THE IRS PHONE SCAM

About a year ago, I posted a message in my blog about an IRS phone scam that’s bilked honest taxpayers out of millions of dollars in the past few years.  The phone scammers try to sound real official, and they threaten all sorts of dire consequences, including arrest and prosecution, if the taxpayer doesn’t cough up the money.  If the taxpayer doesn’t answer the call, the scammers leave a thretening voice message and a call back number.

Five individuals were recently arrested by the Feds in Miami for allegedly running one of these phone scams.  The five were charged with wire fraud and conspiracy to commit wire fraud.  J. Russell George, the Treasury Inspector General for Tax Administration reported that the five alleged criminals scammed about 1,500 victims for nearly 2 million dollars.

I have personally never received one of these calls but a bunch of my clients and friends have, and recently, one of my employees received a voice mail from one of these would-be-scammers.  My employee saved the message and I’m pleased to post it here as a public service warning to all taxpayers. Don’t fall for this scam!

audio player

P.S.  Mr. “John White” calling from a Grapevine, Texas phone number:  I’m glad I’m able to assist you in achieving your fifteen minutes of infamy.  I hope you get caught soon.  Have fun in jail.

BEWARE OF THE BANKRUPTCY CON GAME

A colleague of mine recently sent me a copy of an article published by the National Association of Consumer Bankruptcy Attorneys.  The article piqued my interest because although my law practice is focused primarily on taxpayer defense, I do file a fair number of consumer bankruptcies on behalf of my clients.

The con-men and con-women running this latest bankruptcy scam use software that fools the bankruptcy debtor’s caller ID so it appears that the call is coming from the debtor’s own attorney.  The scammers can easily obtain the name and phone number of the debtor’s attorney from the bankruptcy court’s public records.  The scammer, posing as the attorney, then calls the bankruptcy debtor and tells the debtor that he/she must immediately wire money to pay a debt that wasn’t included in the bankruptcy.  Some scammers have even threatened criminal action if the debtor doesn’t immediately send the money.  The scammers usually call during non-business hours so that the debtor can’t get in touch with his/her attorney to verify whether the call is genuine.

If you are contemplating bankruptcy, or if you are currently in bankruptcy, please be aware that your bankruptcy attorney would never call and ask you to wire funds to pay a bankruptcy debt.  If you are in bankruptcy and you receive a scam call like this, just politely tell the caller that he/she will have to wait until the next business day.  Then call your bankruptcy attorney.

It is unfortunate that scammers, like hyenas and jackals, tend to pray on the poor, the sick and the elderly, but scammers don’t usually use deadly force to steal your money.  Instead, they play on your fear in an attempt to fool you into panicking and making an irrational and costly decision.  My advice is simple—DON’T PANIC—if you don’t panic, you won’t likely get scammed.

IDENTITY THEFT – IRS’s NUMBER ONE PROBLEM

When a thief steals an individual’s identity, the thief can ruin the individual’s credit, drain the individual’s bank accounts AND fool IRS into giving the thief a large tax refund.  Identity theft refund fraud (“IDT refund fraud”) has grown exponentially over the last several years, creating a boon for crooks and a multi-BILLION dollar headache for IRS.  IRS estimated for a recent Government Accountability Office Report that identity thieves stole almost $6,000,000,000 in 2013, but IRS admits that its estimate only includes the fraudulent refund claims IRS knows about. This chart from the GAO Report shows what IRS learned about IDT refund fraud in 2013.

Identity Theft

The good news about this chart is that according to IRS 81% of IDT refund fraud is either prevented or the money is recovered.  The bad news is this:

  • IRS almost never catches IDT refund fraud in time to simply reject the fraudulent return and prevent the fraud.
  • The GAO Report is based on IRS’s estimates of the number of IDT returns.  IRS’s estimates appear to be unrealistically low.  Surprise, surprise.
  • IRS has admitted that there is undiscovered IDT refund fraud, but IRS has no idea how much.  Neither IRS nor GAO estimated the amount of undiscovered IDT refund fraud, but I’d bet it’s over 10 billion.
  • IDT refund fraud is a relatively easy crime to commit. The identity thief doesn’t need to know how to program or hack into a computer or how to prepare a complex tax return.  The thief just has to have the victim’s name, address, date of birth and SSN and the thief has to know how to E-file a simple 1040-EZ return.
  • IRS almost never matches the information shown on the IDT return to the actual W-2 or 1099 information before IRS pays the refund to the identity thief.
  • IRS has been combatting ID refund theft by the “pay and chase” method – IRS pays the refund to the ID thief, and then chases the fraudster down to get the money back.

No wonder the IDT refund scam is so successful.  We are 15 years into the 21st century, and IRS is still using outdated, imprecise analog tools to fight a high tech digital war.

But fear not fellow taxpayer, IRS says things will definitely change for the better in 2016.  I have my doubts.  Beginning with the 2015 return filing season (~01/20/2016 — ~04/15/2016), IRS will begin a “pilot program” to prevent IDT refund fraud.  IRS will partner with some of the larger payroll processing firms (ADP, Intuit, etc.) and place a 16 digit alpha numeric code randomly on some of the employees’ W-2s.  The return preparer will then input the 16 digit code on the electronic return, and the IRS can match the W-2 to the return.  Sounds good in theory, but this pilot program has accountants and preparers howling about delays, input errors and more aggravating and costly red tape.

I tend to agree with the preparers’ complaints.  A sixteen digit secret code won’t prevent IDT refund fraud.  Input errors, delays and aggravation will crash the pilot program before it gets off the ground.  In my opinion, the only way to prevent this multi-billion dollar scam is to require ALL employers (every single one) to submit employee W-2 wage and withholding information and 1099 contractor payments information on or before January 20 of the following year.  This will allow IRS to match the income and withholding information to the taxpayer’s filed return before IRS pays out a dime in refunds.  No W2 or 1099 information on file or no match between the tax return and the employer information = no refundIt’s simple and effective, and that’s the ONLY way IRS can stop this rampant theft of our money.

DISCHARGING INCOME TAXES IN CHAPTER 7 BANKRUPTCY

Throughout most of my 30+ year career, I have been interested in how a taxpayer can legally discharge federal and state income tax debts in a Chapter 7 Bankruptcy.  You may have been told that income taxes cannot be discharged in bankruptcy.  You may even have been told this by a lawyer.  I can assure you that this statement is not correct.  Chapter 7 Bankruptcy discharge of taxes is definitely an option for many people who owe delinquent income tax debts.  In my career, I have represented hundreds of clients who have collectively discharged several million dollars in federal and state income tax.  Click here to see an official IRS account transcript showing discharge of several thousand dollars in income tax.

Although there are many facts and circumstances that can complicate, delay or even deny an individual taxpayer’s bankruptcy discharge, thefive basic rules of discharging federal and state income tax in Chapter 7 Bankruptcy are pretty straightforward.  However, you must bear in mind that these rules only apply to Chapter 7 discharge of state and federal income tax.  Sales tax, employee withholding tax, real property tax, and other types of non-income taxes may not be dischargeable in a Chapter 7 Bankruptcy.  Also, please be aware that a taxpayer can only discharge taxes in a Chapter 7 Bankruptcy if the taxpayer actually signed and filed his/her own return.  Substitute for Return (SFR) assessments (See Myth No. 8) of income tax cannot be discharged in bankruptcy.

Now that the disclaimer is over, here are the five basic rules of income tax discharge in bankruptcy:

  1. The Three-Year Period. The original due date of the income tax return (plus extensions) must be at least 3 years before the bankruptcy petition filing date. That means that a 2011 income tax return filed without extension on or before April 15, 2012 can be discharged in a Chapter 7 bankruptcy filed on or after April 16, 2015* I checked the April 2012 calendar.  April 15, 2012 was a SUNDAY, so the income tax return was due on MONDAY, April 16, 2012.  Just to be safe, I always add at least five days to the three-year period. *  If the taxpayer filed for an automatic extension of time (IRS Form 4868) to file his/her 2012 return, the tax is dischargeable three years after the end of the extension period.  ** I also checked the October 2012 calendar.   October 15, 2012 was a SATURDAY, so the end of the extension period was (or will be) October 17, 2015 the following MONDAY.  Now you know why I always add at least five days to the end of the three year period!
  2. **The Two-Year Period. If the income tax return is filed late, the return must have been filed at least two years before the bankruptcy petition filing date. CAUTION!!  The federal courts have been chipping away at this rule.  Three federal circuit courts (1st, 5th and 10th Circuits) have essentially read this rule out of existence.   This new Circuit Court Judge-invented “interpretation” of the two-year rule holds that income tax on a late-filed return—whether it’s a day late or ten years late—cannot be discharged in a Chapter 7 Bankruptcy.  Thankfully, IRS and many state tax agencies don’t follow this judge made rule.  See my article on the 5thCircuit case here.
  3. The 240-Day Period. The income tax must have been assessed for at least 240 days before the bankruptcy petition filing date. “Assessment” occurs when the Treasury Secretary or an authorized delegate records “the liability of the taxpayer in the office of the Secretary in accordance with rules or regulations prescribed by the Secretary.” Tax on a return signed and filed by the taxpayer is typically assessed within four to twelve weeks after the return is filed.
  4. The No Fraud Rule. If the taxpayer’s return is “fraudulent”, the tax on the return will not be discharged in a Chapter 7 Bankruptcy. Whether the fraud is criminal (taxpayer is convicted of the crime of filing a fraudulent tax return) or civil (taxpayer is assessed a civil fraud penalty on his/her return), it makes no difference.  If the tax shown due on the taxpayer’s income tax return is found to result from criminal or civil fraud, it cannot be discharged in a Chapter 7 Bankruptcy.
  5. Attempt to Evade or Defeat Rule. The taxpayer cannot have willfully attempted in any way to evade or defeat the assessment or collection of the tax.   Like fraud, attempted tax evasion can be either civil or criminal.  And like fraud, when the taxpayer willfully attempts to criminally or civilly evade his/her tax, the tax will not be discharged in a Chapter 7 Bankruptcy.

There are several exceptions to these five rules, both statutory and judge-made, but most taxpayers who meet the five basic rules above are eligible for Chapter 7 discharge.  Call or email me and make an appointment.  Let’s get together and see whether you qualify for Chapter 7 discharge of you income tax debts.

Call (918) 743-2000 or email info@tax-amnesty.com.

THE TRUTH ABOUT IRS OFFER IN COMPROMISE SETTLEMENTS — CUTTING THROUGH THE MEDIA HYPE

I’m sure that everyone reading this has heard on radio or seen on TV the advertisements in which the 1-800 tax settlement companies boast about getting very favorable IRS Offer in Compromise settlements for their clients.  I’m sure the statements are entirely true, but they are also misleading.  The 1-800 company suggests that since the smiling couple in the TV ad settled their tax debt for two cents on the dollar, you will be able to settle your debt for the same percentage amount. Unfortunately, it doesn’t work that way.

Every Offer in Compromise is different.  IRS’s determination whether to accept, modify or reject an Offer in Compromise will be based on the specific facts and circumstances presented by the taxpayers submitting the Offer.  If the smiling couple in the TV ad owes more than their home is worth, has no savings, owes thousands in state income tax and student loans, and has only Social Security for income, it doesn’t really matter how much they owe IRS.  They will be able to settle their IRS tax debt for a very small fraction of what they owe.  However, if you are a young healthy single person with no dependents earning $125,000 a year, with $20,000 equity in your home, a 401(k) worth $50,000 and you owe IRS less than $50,000, you’re not going to get an Offer in Compromise settlement for any amount.

I have negotiated dozens of Offers in Compromise in my 30+ years of tax practice and I have an excellent record (>90%) getting Offers in Compromise approved.  I negotiated an Offer in Compromise recently where IRS settled a $500,000+ tax debt for less than $5,400, but I can’t tell another taxpayer that I can get him/her the same deal.  Despite what the 1-800 companies suggest in their ads, that’s not the way it works.  What I can and do tell my Offer in Compromise clients is that I will submit the lowest offer I can based on the taxpayer’s income, assets, health, age and other circumstances, and I will use my 30+ years’ experience to get the Offer in Compromise approved.  That’s the real truth about Offers in Compromise.

If you’d like to discuss an Offer in Compromise or other tax issue with an experienced tax professional, contact me for a free initial consultation.  Email me at info@tax-amnesty.com or call me at (918) 743-2000.  I look forward to meeting with you soon.

DON’T FALL FOR TAX PROTESTER LIES

I’m writing this blog because I recently visited with a gentleman who wanted my favorable recommendation about an idea he had to avoid paying income taxes.  His idea was based on the notion that income taxes are unconstitutional.  I let the man rant for about thirty seconds before I shooed him away.  I just don’t have time or patience for tax protester arguments.

In 30+ years of practicing tax law, I’ve heard dozens of tax protester arguments attempting to reason why the taxpayer isn’t liable for income taxes.  The reasoning behind tax protester arguments ranges from sophisticated and logical to downright silly.  But the conclusion of the argument is always the same:  “I’m not legally required to file a tax return, I’m not liable for federal income tax and I don’t have to pay the evil gub’mint a dime.”

Taxpayers who buy into tax protester arguments are usually convinced by books they’ve read or (more commonly) internet sites they’ve visited, or the Taxpayer may have gotten the argument from a friend, coworker or relative.  No matter where or from whom the Taxpayer has gotten his or her tax information, the bottom line is this:  TAX PROTESTER ARGUMENTS DON’T WORK!  No matter what the tax protester argument is, it won’t save the Taxpayer any money, it won’t get the Taxpayer out of paying income tax, it won’t get the Taxpayer’s Social Security deposits refunded, but it may get the Taxpayer in serious criminal trouble.  I’m confident to say this because every tax protester argument that’s ever been heard in federal civil court since the 16thAmendment was adopted in 1913 (100% of them) has been defeated.  In civil cases tried in United States District Courts tax protesters are 0 forever.

Tax protesters often try to tell me I’m wrong when I make this point, but I’m not.   The tax protesters’ counter-argument is usually based on the ruling in Cheek v. United States, 498 US 192 (1991), a criminal case heard by the United States Supreme Court.  Tax protesters claim that the United States Supreme Court’s decision in Cheek stands for the proposition that bizarre and even downright stupid beliefs about federal income tax – as long as those beliefs are genuine and firmly held – can get the taxpayer out of having to file returns and pay taxes.  But that is not what the Cheek case held.

[Mr. Cheek’s] defense [in his criminal trial] was that, based on the indoctrination he received from [the tax protester groups he frequented] and from his own study, he sincerely believed that the tax laws were being unconstitutionally enforced and that his actions during the 1980-1986 period were lawful.

Cheek won in the United States Supreme Court, but his win proved only that it’s better for the Supremes to call you stupid than call you guilty.

Even though the dissenting opinion questioned Mr. Cheek’s intelligence for buying into the “income tax is unconstitutional” protester argument, that argument is among the more intelligent tax protester arguments around.  The really, really bizarre arguments (in no particular order) include:

  • The 1213 Concession Argument – Because of King John of England’s May 15, 1213 Concession to Pope Innocent III, the Roman Catholic Church to this day owns England and the United States. And we all know we don’t have to pay income tax to the Pope.
  • The Nom De Guerre or Strawman Argument – If the Taxpayer’s name is spelled in all capital letters on a document from IRS or a court, the document doesn’t refer to the Taxpayer human being, it refers to a separate fictitious legal entity known as the “STRAWMAN”. Let the “strawman” pay the tax.  I’ll just go home and watch TV.
  • The 1040 is a Codicil Argument – This argument claims that IRS Form 1040 is really a codicil to a will, as in last will and testament. I’ve read this over twice, and it still makes no sense to me.  But it’s out there on the net, and there are hundreds of tin-foil-hat wearing “patriots” who actually believe this nonsense.
  • The Birth Certificate as Legal Tender Argument – This argument claims that the Taxpayer’s Birth Certificate is worth real money and can be used as legal tender to pay income taxes. This is an offshoot of an insane theory involving international law, common law, the Queen of England and the Pope.  It will make a sane person’s head hurt, but it will not pay your taxes.
  • The Sovereign Citizen Argument – This argument has dozens of variants and offshoots, but it is based in part on the definition of the words “state” and “United States” in Section 7701 of the Internal Revenue Code (“IRC”).  The term “state” is defined in the IRC asincluding the states and the District of Columbia, and the term “United States” is defined in the IRS as including the District of Columbia.  VOILA!   United States includes only D.C.  The rest of the folks who live in the 50 states aren’t subject to the United States income tax.  You can find an amusing federal district court order discussing one elaborate form of this wacky argument here.

All I need to say about every tax protester argument that’s ever been made is this:  THEY NEVER WORK SO DON’T BUY INTO THIS GARBAGE.

I don’t make silly tax protester arguments, but if you have a serious tax problem, call (918-743-2000) or email (info@tax-amnesty.com) me.  I can help solve the problem.