How Can Filing Bankruptcy Help You to Correct Your Tax Liability?

How Can Filing Bankruptcy Help You to Correct Your Tax Liability?

It is a new year. The holiday season is over. So guess what is next? TAX SEASON! It is that time of year to start thinking about getting your paperwork together and filing your taxes. But what if you have not filed your taxes for a few years? Well, if you don't file any taxes, then the IRS will file one for you. This is known as a substitute tax return.

This substitute return takes the place of an actual return. If you still don't take any corrective action, such as filing an actual return, then the IRS will go ahead and start collection proceedings against you. The collection process would include filing a tax lien on your real estate and personal property. If you continue to ignore the IRS, they will start garnishing your wages and bank account.

I have heard of all the excuses before when I ask a client why they didn't file. They may say because they owe taxes. But that doesn't mean they don't have to file taxes. The IRS will just make your life a lot worse.

So what if you have all these substitute returns for you in which you feel the taxes being charged to you by the IRS is inaccurate? Or what if you disagree with the IRS on some adjustments they have made to your tax returns? Well, you can take it to the US Tax Court. However, Congress also created another forum for you to argue your taxes. The US Bankruptcy Court. That's right. You can actually argue your tax debt before the US Bankruptcy Court.

It is in 11 USC 505. It states:


(1) Except as provided in paragraph (2) of this subsection, the court may determine the amount or legality of any tax, any fine or penalty relating to a tax, or any addition to tax, whether or not previously assessed, whether or not paid, and whether or not contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction.

(2) The court may not so determine—

(A) the amount or legality of a tax, fine, penalty, or addition to tax if such amount or legality was contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction before the commencement of the case under this title;

(B) any right of the estate to a tax refund, before the earlier of—

(i) 120 days after the trustee properly requests such refund from the governmental unit from which such refund is claimed; or

(ii) a determination by such governmental unit of such request; or

(C) the amount or legality of any amount arising in connection with an ad valorem tax on real or personal property of the estate, if the applicable period for contesting or redetermining that amount under applicable nonbankruptcy law has expired.

I have done this a couple of times. I had a case recently where my client had not filed taxes for 7 years. The IRS subsequently filed substitute returns for my client in which they assessed taxes in an amount around $100,000. I filed a Chapter 13 for my client. My client then prepared their 7 years of tax returns. I then filed a Motion to Determine Tax Liability under 11 USC 505 and I attached the 7 years of tax returns to the Motion. It took the IRS a little over a year to review everything. But in the end, the IRS reduced the Tax liability to approximately $7000.

So Bankruptcy has already helped my client.

So if you have a tax debt you disagree with and you have other debts you would like to get rid of, think about filing for Bankruptcy. In Bankruptcy you can get rid of your debts and have a determination on your tax debt.

Be sure to look for a good Bankruptcy attorney who understands this in the Akron, Canton, Wooster, New Philadelphia area.

Now don't forget to file your taxes.

Happy Tax Filing!

Submitted on 1/8/2015

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