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Archive | April, 2014

Federal Income Tax Tips for Filing, Refund Allocation, and Unpaid IRS Debt

Update: If you use TurboTax, and you’re still working on your taxes for tax year 2013, you should probably change your password. This article discusses a serious vulnerability in the web server software in use by some organizations. Take precautions to protect your information and identity.

As I write this, tax day for federal income tax year 2013 is only a few days away. You may have some unfinished business to clear up, whether it be to file your taxes for 2013, to make preparations to make for a smoother tax season next year, or to understand how to handle unpaid taxes. Let’s examine some topics that I hope you will find beneficial now and useful throughout the coming year.
Tax Return documents

Tax Preparation Software

According to an opinion piece published in the Wall Street Journal, “…more than three-fourths of all individual tax returns will be filed electronically [this year].” For those taxpayers who use their own computers and tax preparation applications, “Taxpayers who employ an accountant or other preparer have some protection from daunting penalties if the IRS finds mistakes. Software users who prepare their returns without help have little or no protection.”

Some pretty famous people have had problems, or claimed to have problems, with tax preparation software. According to the story, “During the confirmation hearings of Treasury Secretary Timothy Geithner three years ago, we learned that he failed to pay self-employment tax on income from the International Monetary Fund. Mr. Geithner partially blamed the oversight on the TurboTax software he had used…”

Today, the IRS and the tax court have not sided with taxpayers who claim “the TurboTax defense” like Secretary Geithner. In fact, the article states that, “So far the U.S. Tax Court has nearly always rejected the TurboTax defense. Only two cases have offered taxpayers penalty relief for software reliance.”

Ideas for Action

  1. The primary responsibility for accurately preparing a return with tax preparation software still resides squarely on you, the taxpayer. Careful review of your return manually remains important, especially if your tax situation is complex.

How to Fix a Botched Return

Jonnelle Marte’s column on the MarketWatch site picks up the thread, and offers a good backgrounder on when and how to fix mistakes in a previously filed income tax return. According to the article, “Tax pros say you should come clean about mistakes on your tax return as soon as possible, but exactly how you do so depends on the mistake. In fact, not all errors require filing an amended return, the Internal Revenue Service says.”

Ideas for Action

  1. Don’t file another original return on IRS form 1040. Use IRS form 1040X, even if you’re amending your return for tax year 2011.
  2. You have up to three years to refile a return that will produce a refund. The article explains the conditions that apply, and when the three year deadline ends for each tax year.
  3. Tax due situations are nothing to mess around with. If you owe a substantial amount, engaging a tax professional is a very good idea. According to the article, if the IRS discovers the error, “the government will bill you for: (1) the unpaid tax amount plus interest (currently at a 3% annual rate), (2) the additional failure-to-pay interest charge penalty (at a 6% annual rate), and (3) maybe other penalties too. But the IRS can waive penalties if you show you had a reasonable cause for the underpayment.”
  4. The article concludes by advising us to “be sure to use the current version of Form 1040X http://www.irs.gov/pub/irs-pdf/f1040x.pdf, which you can print out from the IRS website at http://www.irs.gov/. (Right now, the current version is dated December 2011.) If you need to attach corrected or additional tax forms, be sure to use the forms for the year you’re amending. For example, if you’re filing Form 1040X to claim additional itemized deductions for 2010, you’ll need to attach a corrected 2010 version of Schedule A. The IRS website has prior-year tax forms too (click on Forms and Publications; then click on Previous Years http://www.irs.gov/app/picklist/list/priorFormPublication.html).”

Budgeting

There are plenty of books, articles, software, and other media that explain how to establish a budget. Perhaps the hardest part is to commit to the plan you establish, regardless of how to implement it. At least the cost to establish a budget has gone down dramatically.

Intuit, the company behind Quicken and TurboTax, has a free online budgeting tool for families and individuals called Mint https://www.mint.com/. Intuit claims to have 7 million Mint users. The product is pretty simple to use, and may be all that you need to help you see where your money is going, and help you perform some rudimentary tax planning to avoid surprises in tax years to come.

Columnists like Dave RamseySuze Orman, and other “celebrity financial experts” all have good plans, and will sell you tools, books, and programs to manage them in some cases. Whatever approach you take, it is never too late, and never too early, to make a financial plan and follow through on it.

Ideas for Action:

  1. Always file your tax returns on time–even if you can’t pay. You can get an automatic six month extension to enable you to complete your tax return filing for the year. Here’s an article on the IRS web site with more details on the procedure.
  2. The IRS has a “Fresh Start” initiative to help struggling taxpayers. Here’s an article that describes the program.
  3. Tax problems can be complex. I may be able to help you understand your situation; I can certainly help you by discussing certain trade-offs and options concerning your situation with the IRS and bankruptcy.

If You’re Due a Federal Tax Refund

Congratulations! Your refund as a consequence for paying too much in tax withholding will hopefully arrive soon. What should you do with this windfall? I wrote an article for tax year 2012 that offers seven alternatives for allocating your refund that I recommend to you.

IRS Debt and Bankruptcy

Generally speaking, taxes are exempt from discharge through bankruptcy. However, in some cases, you can discharge an IRS debt using a Chapter 7 bankruptcy filing. The only IRS debts that can be discharged are those that are over three years old. There are certain conditions that must be met first. Read more about IRS and bankruptcy in an earlier article I posted on my site.

If All This Seems Confusing or Too Complicated, Please Call Us for Help

Tax problems can be complex. I may be able to help you understand your situation; I can certainly help you by discussing certain trade-offs and options concerning your situation with the IRS and bankruptcy. Contact my office for a free, no obligation consultation right away!

What Happens if My Chapter 13 Bankruptcy Plan is Dismissed Because I Can’t Afford the Payments?

The simple answer is that few plans should be dismissed for failure to make payments. In general, I can often secure a court order to reduce the payments and/or forgive accumulated payments. A qualified and caring Chapter 13 practitioner can and will ask the judge to “modify” the plan to meet your changed circumstances, if you make an appointment to come in and consult with us before it is too late.

A conversion to Chapter 7 bankruptcy may also be an option, or a filing a new Chapter 7 bankruptcy case after your Chapter 13 bankruptcy case is dismissed. In many cases, “straight bankruptcy”, also known as Chapter 7 bankruptcy, is preferable to long-term credit recovery.

James H. MaGee, Washington Bankruptcy Attorney

I am a qualified and caring Chapter 13 bankruptcy practitioner who can and will ask the judge to “modify” your plan to meet your changed circumstances. Make an appointment to come in and consult with us before it is too late.

Your Creditors Will Return if Your Chapter 13 Bankruptcy Plan is Dismissed

If your Chapter 13 bankruptcy plan is dismissed, either because it can’t be modified, or the modification to your Chapter 13 bankruptcy plan isn’t filed in time, eventually your creditors will return and start attempting to collect their respective debts again. Your creditors can collect again because no discharge of debts was issued since your Chapter 13 bankruptcy plan wasn’t completed.

Let’s Review Some Basics: What Is A Chapter 13 Plan?

A Chapter 13 bankruptcy plan is a “reorganization plan” where debtors make payments on their debts over a period of three to five years. Today, Chapter 13 cases are less common than Chapter 7 “straight bankruptcy” cases. In the Western Washington State area where I practice most of my cases, only about 20% of bankruptcy cases filed are Chapter 13 cases.

Higher income debtors are sometimes ineligible to file Chapter 7 bankruptcy, and must file for Chapter 13 bankruptcy in order to repay some portion of their debts. The amount of Chapter 13 bankruptcy plan payments is calculated by the application of a complex multi-page formula. I am very familiar with this formula and process, and I can help you estimate the amount of Chapter 13 bankruptcy plan payments you would be required to make in your specific circumstances.

Some lower-income debtors file a Chapter 13 case for one or more of these reasons:

  • Stop the foreclosure of your home, and catch up on missed house payments over time.
  • Reset payments with a car lender who is threatening to repossess your vehicle.
  • Repay your defaulted IRS taxes interest-free.
  • Restore your drivers’ license that was suspended for nonpayment of court fines and tickets.

Depending on income, many Chapter 13 bankruptcy cases propose to repay little if any general unsecured debts, including medical bills, defaulted obligations to landlords, and credit card debt.

Many debtors in Chapter 13 bankruptcy are good, hardworking folks who are struggling to get by financially. Some folks are “on the edge” financially, and some of their Chapter 13 bankruptcy plans do not complete. In those cases, their Chapter 13 bankruptcy plans are dismissed, and their creditors can restart collection calls and collection lawsuits against the debtors.

You Can Be Sued Once Your Bankruptcy Case Is Dismissed

A debtor who is fresh out of a failed Chapter 13 plan can be sued by creditors once their bankruptcy plan or case is dismissed when these conditions are met:

  • When the statute of limitations to file suit on a tort or breach of contract expires after the dismissal date of the Chapter 13 bankruptcy plan.
  • When the Chapter 13 plan is dismissed for the debtor’s default because of failure to make the Chapter 13 reorganization plan payments.

11 USC 108(c) (1) generally provides that bankruptcy does not interrupt the running of a statute of limitations. If the creditor had six years to file a lawsuit from the date of breach of contract, the six-year period is neither shortened nor extended by the bankruptcy as long as the Chapter 13 bankruptcy plan begins and then fails over a time period that is within that six-year statute of limitations to file suit.

An Example of the Six Year Statute Of Limitations to File Suit

Suppose that you are a debtor who breached a written contract with one of your creditors on August 1, 2009 and then after the creditor hounded you for a year, you the debtor filed Chapter 13 bankruptcy on September 1, 2010. The six-year statute of limitations to file suit to collect this debt starts on August 1, 2009. If your Chapter 13 bankruptcy case is dismissed without issuance of a discharge on September 1, 2014, due to defaults or failures in the Chapter 13 bankruptcy plan payments, the creditor still has a long time to file suit against you the debtor. The creditor can file suit as late as July 31, 2015 because the statute of limitations to file suit runs out on August 1, 2015, some six years after the breach of contract on August 1, 2009, and almost a year after the Chapter 13 bankruptcy case was dismissed for non-performance on September 1, 2014.

As we can see from the example above, the deadline to file suit to collect a debt is six years after the breach. The deadline is neither extended nor shortened due to the fact that the debtor was in bankruptcy during the six-year time period.

What Should You Do Today If Your Chapter 13 Plan Is Unaffordable or Your Circumstances Changed?

There is a lot that we can and will do to help you. Contact the Law Offices of James H. MaGee, Washington Bankruptcy Attorney today!