Frequently Asked Questions
Explanation of Discharging Tax Debts
The way to think of it is that it would not be fair to the Internal Revenue Service if a taxpayer could file his tax return one day and discharge it in bankruptcy the next day. Therefore, a certain amount of time has to pass from certain events in the life of that tax debt (like from when the return was filed) before “fairness” says IRS had a chance to collect, now bankruptcy should be an option to the taxpayer.
There are certain rights a taxpayer can exercise that, by law, prohibits IRS from taking further collection action against that taxpayer as long as that “right” is being exercised. It would not be fair to IRS to have that period of time during which IRS cannot collect from the taxpayer still count toward the amount of time necessary for a tax debt to be old enough to discharge. Therefore, if one (or more) of these “rights” is exercised by the taxpayer prior to when the tax debt is old enough, the law requires additional time be added on before that tax is now considered old enough to be discharged.
It may not be worth waiting to discharge all of the client’s tax debts, just the big ones. For example, if the taxpayer owes taxes for 2007 and 2008 in the amount of $15,000 and $25,000, respectively, and another $1,500 for tax year 2009, the taxpayer may not care when 2009 is dischargeable (it’s only $1,500) but the taxpayer definitely wants to know when 2007 and 2008 are dischargeable. In that case, the Software Program would be used twice, once for each of 2007 and 2008. Of course, the cost of using the Software Program is so low (compared to the amount of taxes owed) that the taxpayer may want to use the Program a third time to analyze tax year 2009.
Do not be fooled by the tax year involved; that’s only one of the many tests that determine dischargeability. There are many old, large tax debts out there as a result of tax shelters promoted in the ‘80’s that were litigated and just recently settled. They may not yet be dischargeable. Plus, the older the tax year the more the taxpayer is going to owe in penalties and interest that have accrued over the years. Do you really want to risk committing malpractice on such a large amount to save a couple of bucks?
At a minimum, you can use this Program to inform your clients how long they would have to wait to file BK in order to discharge their tax debts. If they choose not to wait, then you could never be sued for malpractice because you gave them the information and the tools to make an informed decision. Of course, it would be advisable to have your research and advice, and client's decision, reduced to writing and kept in your files to protect yourself.
If your client chooses to wait, simply enter into a small monthly repayment agreement with IRS (based on your client’s ability to pay) until the requisite period of time has passed. This is a service you can provide (additional revenue stream
) or you can outsource it to us, and the client goes back to you for the bankruptcy filing. You could even have us “ghost” it for you, where the client hires you and you hire us (although we need the client to sign a Power of Attorney). If you are interested in any of these services, please contact us at firstname.lastname@example.org
There are a few unsettled issues of law in this area, and the program was written in such a way as to take into account their most probable interpretation, after consultation with other bankruptcy and tax attorneys and IRS’ Insolvency Unit. The reason we did that is that for the most part, your clients want certainty that when they file their bankruptcy the taxes will be discharged. They also don’t have the financial resources necessary to be a test case.
This Program analyzes all tests that are “date-dependent”. It does not and cannot analyze whether your client has willfully evaded the payment of tax, or committed some form of tax evasion, either of which would prevent dischargeability of that tax debt.
Of course, the Program relies on the accuracy of the information on the Account Transcripts and the user's ability to accurately input requested data into the Program. If either the Account Transcript is incorrect, or the user makes a mistake in inputting the data, or there is other data not reflected on the Account Transcript, the Program may or may not render the correct Answer, but neither the Program, its owners, creators, employees, or contractors are liable for any such reasons.
Remember, you, as the attorney, are responsible for your own, independent research. But where there is no or limited help in this area, this may be your best tool available.
Of course, this program is not intended to be, and shall not be considered to be, the rendering of legal advice. You should always conduct your own legal research and seek professional advice when in doubt. This program is intended to help the bankruptcy professional with the applicable rules (so none are missed or forgotten) and calculations (so as to avoid "counting" mistakes). However, it was developed in conjunction with some of the top tax/bankruptcy attorneys in the nation and with input from IRS' Insolvency Unit as well. It is used by many practitioners nationwide.
List the IRS debt as an Unsecured Non-Priority tax debt on Schedule F. Be sure to list IRS' address as:
Department of the Treasury
Internal Revenue Service
Centralized Insolvency Unit
P.O. Box 21126
Philadelphia, PA 19114-0326
(address correct as of 2014)
In the middle column, simply list the tax years to be discharged, such as:
2006, 2007, 2008, 2009
U.S. Individual Income Taxes and related penalties and interest relating to tax years ending December 31, 2006 through December 31, 2009.
In the right hand column, list the approximate total of all years (in the aggregate).
We do not recommend filing an Adversary Proceeding against the IRS to have the court declare the taxes discharged. Rather, wait about 60 days after the Discharge is entered and call the Insolvency Unit at 800-973-0424 and inquire whether your client's tax debts will be recognized as discharged.
If you file an AP, the advantage (assuming you "win") is you have a court order determining the taxes to be discharged. However, if a young, energetic attorney with the Department of Justice wants to make a name for himself, he has an unlimited budget to try to prove that your client willfully evaded the payment of the taxes. If you don't file an AP, you won't have a DOJ looking into your client's lifestyle. But if the Insolvency Unit agrees the taxes are discharged, and abates the liabilities, no further collection attempts will be made by IRS.
How to Obtain Official Transcripts
You need to obtain an Account Transcript from the IRS in order to be able to properly complete the Checklist and use the Program.
You must have either a form 2848 [Power of Attorney] or form 8821 [Tax Information Authorization] signed and dated by your client. We recommend using the form 8821. Click here to print a blank form 8821.
Once you have printed all of the checklists
[one for EACH tax year to be researched
], and have the form 8821
printed, properly completed, and signed and dated by your client, you are ready to begin.
Call the IRS Practitioner’s Hotline telephone number, which is 866-860-4259, then follow the prompt for “individual taxpayers” [usually prompt #3]. Be prepared to be on hold for up to an hour or two.
BEGINNING JANUARY 2014, IRS NOW STATES IT WILL ONLY HELP PRACTITIONERS WHO ARE "ACTIVELY WORKING WITH THEIR CLIENTS TO RESOLVE TAX PROBLEMS". THEREFORE, IF ASKED, BE SURE TO STATE THAT YOU ARE ACTIVELY WORKING WITH YOUR CLIENT TO RESOLVE THEIR TAX DEBTS.
When you are served, tell them you would like their fax number so that you can fax a form 8821. Once they receive the form 8821, they will ask you “disclosure” information about your client, all available to you on the form 8821. You can tell them you are not prepared to provide additional information about your client at this time [such as their telephone numbers, where they work, or where they bank]. After you have cleared “disclosure” simply ask that they fax you Account Transcripts for each tax year for which your client has an outstanding tax debt. Also find out if there are any tax years for which your client has not filed a tax return and, if any, ask them to fax you “wage and income information” about each such year.
If there are any “code 520’s” ask what the closing code [not action code] is for each code 520 [and write the answer on the checklist].
If you are representing a woman who is married, separated, divorced or widowed, the IRS will have to research the account of your client’s current, former, separated or deceased husband to find any information about her. This is because the IRS uses a rather antiquated system whereby it can only retrieve information about the taxpayer whose name was listed second on the tax return by accessing the information for the taxpayer whose name was listed first, which is almost always the husband. If the IRS cannot find anything about her under either his or her SSN, ask them to check the Non-Master Files for your client. Without getting too complicated here, understand that sometimes joint accounts are separated into two, distinct accounts [such as when some action is taken with respect to a certain tax year by one spouse but not the other] and the information about one or both of them may not be accessible in the normal fashion, but rather by IRS accessing its Non-Master File Accounts.
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