Articles Posted in Tax Debt

Millions of letters are mailed by the IRS each year to taxpayers for many different reasons. If you get a letter from the IRS here are a few suggestions on what to do.

Open the letter right away and don’t panic. Most IRS letters will be about your federal tax return. Each letter will deal with a specific issue. Each letter will give you specific instructions on what to do. It is important you read the letter carefully. Read it two or three times, if necessary, to fully understand what is being said.

An IRS letter could be about changes to your account, taxes you owe, or a request for payment. It could be a request for more information about your tax return.

tax-return-150x150I’m speaking of your actual tax return – the 1040 Form with all schedules and attachments.  Make sure you get an electronic copy or a paper copy of your tax return if you’ve filed electronically.  Starting with 2017 tax returns, the IRS may ask you for the amount of your Adjusted Gross Income (AGI) from the last return you filed in order to verify your identity.

The Adjusted Gross Income (AGI) is the amount at the bottom of the first page of your tax return. So, if you file your own tax return, print a copy or save it to your computer before you log out. If you use a tax preparation service, make sure you get a printed or emailed copy from them when the tax return is filed.  Trying to track down the person that prepared your taxes six months or more later to get a copy can be a frustrating process.

There are also many other reasons to always maintain a copy of your tax returns.  For example, you may be asked to provide a copy of your tax return for your child when they apply for college and/or financial aid.  If you are considering filing bankruptcy, you will need to provide a copy of your last two years of tax returns to the Trustee. Whenever you wish to buy a home, you will be asked to provide copies of tax returns by whomever you are applying with for a mortgage loan.

Criminals are impersonating IRS agents and making aggressive and threatening phone calls to taxpayers.

phone-scam-150x150During filing season, the IRS sees a surge in scam phone calls that threaten police arrest, deportation, license revocation and other things. Be on guard against these con games that happen throughout the year, especially during tax season.

“Don’t be fooled by phone calls by criminals impersonating IRS agents with threats or promises of a big refund if you provide them with your private information,” said IRS Commissioner John Koskinen. “If you’re surprised to get a call from the IRS, it almost certainly isn’t the real IRS. We generally initially contact taxpayers by mail.”

“Everyone can share the word about scam phone calls– just hang up and don’t engage these people,” Koskinen said. “Despite recent successes against phone scam artists, these scams constantly evolve and people need to remain vigilant. We’d like to thank law-enforcement, tax professionals, consumer advocates, the states, other government agencies, the Treasury Inspector General for Tax Administration and many others for helping us continue this fight and protect taxpayers.”

How do the scams work?

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There are 4 ways you can get a copy of your tax return information or transcripts.  If you are filing bankruptcy, you will need a copy of the last 2 (two) years filed tax returns regardless of whether you owe(d) taxes or receive(d) a refund.  Example – if you were filing bankruptcy in March 2015 and had not filed taxes yet for 2014 (not due until April 2015), you would need a copy of 2012 & 2013 tax returns.  If you were filing bankruptcy in May 2015, you would need a copy of 2013 & 2014 tax returns (unless you had filed an extension for 2014).  Unless you are exempt from filing (click here to see who is exempt), you must have filed all the tax returns that are due prior to filing for bankruptcy.

If you have lost your copy, there 4 ways to gain another copy of your tax return or transcript for whichever years you are in need of:

  1. Online – go to www.irs.gov and click on “Order a Tax Return or Account Transcript”.
  2. Call 1-800-908-9946 and follow the voice instructions.
  3. Mail – IRS Form 4506-T or Form 4506-T-EZ “Request for Transcript of Tax Return”.  The forms are available online (see #1 above) or by calling 1-800-829-3676.  The transcripts will be mailed to your home address, at no charge.  You must allow 5-10 days delivery time.
  4. Go to IRS office – There is an IRS Tax Department office located at 100 W Capitol Street, Jackson, MS. You may have to wait in line, etc, but if you are in a rush and do not have online access, it is possible to go to the IRS office and obtain a copy on the spot.  There may be other office locations that can assist you.  Look online or call the nearest IRS office and see if they provide this service. Not all locations provide the same services.

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tax-refundWhether you have already filed your tax return and received your tax refund yet or not, if you are thinking about filing bankruptcy, you may be wondering whether or not you’ll get to keep your tax refund.  Under Chapter 7 and Chapter 13 bankruptcy, your tax refunds are protected by Mississippi Law.  This means that your income tax refund is protected (exempt).  It is a protected asset (up to a certain amount). Mississippi law allows you to keep up to $5,000 in federal tax refunds ($10,000 as a married couple filing jointly), up to $5,000 in Earned Income Tax Credits ($10,000 as a married couple filing jointly), and up to $5,000 in state tax refunds ($10,000 as a married couple filing jointly).  So if you’re asking, “If I file bankruptcy, can I keep my tax return?”, as long as you don’t receive a refund above those amounts, filing bankruptcy won’t affect your tax refunds.

What if your federal tax refund is more than the protected amount?  If you get more than $5,000 back each year from the IRS, the best thing you can do is adjust your withholding to reduce the amount of taxes you are paying and maximize the amount of money you take home each pay period.  With food and fuel prices going up, most of us need the money in our paychecks right now, rather than getting a large sum back at tax time.

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Most unsecured debts will be wiped out in a Chapter 7 bankruptcy.  Unsecured means that the debt does not have any property pledged as security.  This includes credit cards, medical bills, lines of credit, payday loans, overdraft protection, signature loans, and personal loans.  There are certain types of unsecured debts that cannot be eliminated in bankruptcy.  The two most common types of debt that people think cannot be done away with are student loans and taxes.  These can be wiped out, but only if you meet special circumstances.  Student loans are not wiped out in bankruptcy, unless you can prove that paying them would create an undue financial hardship for you or your family.  Income tax debts can be eliminated, under certain circumstances, if they are more than 3 years old before the date you file the bankruptcy.

mort debt relief act expiredMississippi homeowners who suffer a foreclosure or who sell their home at a loss will not be able to use the Mortgage Forgiveness Debt Relief Act to exclude taxes on the “forgiven” or “canceled” debt from the loss.  The Act expired at the end of 2013.  Debt that is reduced by mortgage modifications also qualified for the relief.  Forgiven debt or canceled debt is any debt that is wiped away or written off.  Forgiven debt is considered taxable income by the IRS and you will now have to pay taxes on this money.

The Mortgage Forgiveness Debt Relief Act created an exception that allowed taxpayers to exclude this income.

Any debt modified or discharged in bankruptcy is not considered income and is not subject to payment of taxes.  Since the Mortgage Forgiveness Act has now expired, filing bankruptcy or using the Internal Revenue insolvency exception is the only way to get rid of this income and not be required to pay taxes on the forgiven debt.

In order for a creditor to garnish your wages, they must first file a lawsuit regarding the debt in question and receive a court judgment in their favor (win the lawsuit).  Once this occurs, they will receive an order of garnishment also referred to as a writ of garnishment.  This order is sent to your employer who must hold this writ of garnishment for 30 days.  The reason a 30 day hold requirement was placed into the process is to allow time for the employer and the employee to verify that the order is for the correct person, etc.  The problem is that employers are not required to notify you that they have received an order of garnishment.  They may simply hold it and you will find out 30 days later when your first check is garnished.

It’s important to note that a garnishment is applicable to any money in possession of a third party (ie: your employer, your bank, etc).  It’s not limited to only what you earn.  Wage garnishment is simply the most common form of garnishment.

Garnishment is an option for a creditor for any type of debt that results in a judgment in favor of the creditor.  Lawsuits for breach of contract or to collect debts owed for cars, medical expenses, promissory notes, etc are all applicable.  Even debts relating to taxes and domestic support obligations (child support or alimony) can lead to garnishment.

paying uncle samIn a Chapter 7 and Chapter 13, as long as four basic criteria are met, both state and federal income taxes can be discharged.

  1. The tax return due date was at least 3 years before filing bankruptcy.
  2. The filing of the tax return must have been done at least 2 years before the bankruptcy filing.
  3. At least 240 days before filing bankruptcy, the taxes must have been assessed.
  4. The tax return is not fraudulent and the taxpayer is not guilty of tax evasion.

For example – 2009 taxes were not due until April 2010, so based on the first criteria above, they could not be discharged until 2013 when they will then be 3 years old.

Sales taxes, taxes withheld from employee salaries, taxes that have priority status, and income taxes that do not meet the criteria above cannot be discharged (wiped out) in a bankruptcy.  However – they can be paid out over the period of a Chapter 13 plan (3-5 yrs).  This is often a lower payment amount than what the IRS would make arrangements for and the bankruptcy stops the penalties and interest that would  otherwise continue to accrue.  As well, if the debt is large and payment in full would not be possible within a single Chapter 13 plan (max of 5 yrs), it is possible to file back to back Chapter 13 cases that would extend the protection of the court and payment plans longer than 5 years.

If you filed had your home foreclosed or surrendered it in bankruptcy last year you will be receiving a 1099 from your mortgage company.  Do not ignore this.   Deal with it now, otherwise it will cause you problems in the future.

Here is what you need to do. IRS-Form-1099-MiscThere is a special tax relief available called the “Mortgage Forgiveness Relief Act of 2007“.   This will forgive the debt and you will not owe any tax on the amount listed on the 1099 form.  Make sure your tax preparer knows you suffered a foreclosure or filed bankruptcy.   If you have already filed your tax return then you will need to file an amended return.