Bankruptcy is at an all-time high in America. Many people have filed for bankruptcy because they feel they don’t have any other options. If you are considering bankruptcy, look at these items and see if you have done them first.

1. Prioritize: If you are feeling overwhelmed with bills, start prioritizing and worrying about the ones you can pay for and work from there. Things that are important are things, such as house payments and car payments. Things that shouldn’t take precedent, even if the creditors are hounding you, are things like credit card bills. Worry about getting the essentials paid for first and if you have money left over, start working on the others.

2. Budget: Keep track of where your money is going with the aid of a budget. If you have never been good at budgeting, find someone who is and see how they do it. An easy way to budget is budget according to when you get paid. Track the money you receive each time you get paid, whether that’s once a month, bi-monthly, or each project you complete. Go over your previous expenses and see what areas you can cut. When you are in dire debt, you need to cut out all excess stuff you don’t need.

3. Alternative Options: Have you looked in to any alternatives to bankruptcy? These things include debt settlement programs, lowered payment plans, loan modification, among others. An alternative might not always be an option, especially when you don’t have any income, but if you do have a job and are just running behind an alternative option might be a good choice.

4. Avoid Quick Scams: Paying off debt takes time. It won’t happen overnight. Don’t fall victim to scams that claim you can drop your debt in half by following through with their program. These scams almost always end up making your debt much worse than it already is.

5. Talk to Others: Ask for professional opinions about what your options are. Speak to your neighbors, co-workers and family members and brainstorm what choices are in front of you. Simply talking to others might be able to help you find a solution to bankruptcy that you did not know about or hadn’t thought of before.

6. Cut all wants: This is not a fun step, but it is a necessary one. You’ve gone through your budget once before, but if you are still behind its time to cut all excess and live as modestly as you can. Sell your home and move in to a smaller home or apartment until you can get back on your feet. Sell your car and get a cheaper model or bike to work. Have all the kids cancel their cell phones on your phone plan. Whatever you don’t absolutely need to survive should be cut so you can get your debt under control. Once you are on top of your payments then you can start re-introducing things back into your budget.

7. Gut feeling: Trust your instincts. If you feel that you haven’t exhausted all your possibilities, don’t give up. Keep working at getting your debt under control. If you feel that its time to file for bankruptcy, don’t ignore that feeling either. There are great bankruptcy attorneys who can help.

In watching the news, we have seen that Ronnie Deutsch had been charged criminally, Tax Masters Has filed Bankruptcy and other firms that promise IRS Offer in Compromise settlements for “Pennies on the Dollar” have been investigated by Regulatory Agencies.

These firms promise the world and often don’t deliver.  We have heard many stories of clients who have paid these companies thousands of dollars and at the end were in worse shape than before they hired these companies.

How can Taxpayers protect themselves from these OIC scams, then?

First, check out the Better Business website.  Reputable companies will have outstanding ratings with the BBB.  They will not have scads of complaints.

Second, check for references.  Often, websites will have testimonials that will give you a good indication of their integrity.

Third, beware of outlandish promises.  Offers in Compromise are just not given out freely by the IRS.  They will require that you prove that you do not have the ability to pay the taxes.  They will require  significant financial documentation.

Finally, beware of firms that are more interested in getting fees from you than solving your IRS Tax Problems.

Our firm prides ourselves on giving honest and candid advice.  We often have to tell people that they simply don’t qualify for an Offer in Compromise.  There are often other solutions to their problems, such as: non collectible status, installment agreements, bankruptcy and others.

Employers have a responsibility to withhold income from their employees’ earnings and deposit those withholdings and employment tax with the Internal Revenue Service.  These taxes are called trust fund taxes because you actually hold the employee’s money in trust until you make a federal tax deposit in that amount.  To encourage prompt payment of these trust fund taxes, Congress has passed a law that allows for certain individuals to be personally penalized for the failure of to properly withhold and deposit these taxes.  This penalty is called a Trust Fund Recovery Penalty.

What is the Trust Fund Recovery Penalty?

The Trust Fund Recovery Penalty is a penalty in the amount equal to the unpaid balance of the trust fund tax.  It essentially authorizes the Internal Revenue Service to penalize an individual personally for the failure of the business to pay the taxes.

Who Can Be Responsible for the Trust Fund Recovery Penalty?

The Internal Revenue Code authorizes the assessment of the Trust Fund Recovery Penalty against any person who: (1) is responsible for collecting or paying withheld income and employment taxes, and (2) willfully fails to collect or pay them.

A responsible person is a person or group of people who has the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes.  The Internal Revenue Service generally looks to the owners of the business, and those with authority and control over the funds of the company.

For willfulness to exist, the responsible party: (1) must have been, or should have been, aware of the outstanding taxes, and (2) either intentionally disregarded the law or was plainly indifferent to its requirements.

The Internal Revenue Service will typically investigate irregularities with employment tax payments and informational returns, such as the Form 940 & Form 941.  When a business has problems with employment tax liabilities, all owners, directors, and some employees have a significant reason to be concerned about a potential assessment of the Trust Fund Recovery Penalty.

What To Do?

Once the Trust Fund Recovery Penalty is assessed, the Internal Revenue Service can take collection action against personal assets. If you are contacted by the Internal Revenue Service, you need to seek the immediate advice of an experienced tax attorney.  The most important time to resolve a potential Trust Fund Recover Penalty is before the penalties are assessed against you personally.  The Internal Revenue Service needs to be contacted by your counsel in order to protect your rights against the Trust Fund Recovery Penalty.  If the Trust Fund Recovery Penalty is assessed to you already, you still have many options in order to resolve the assessment of the penalties.  At Martelle, Bratton, and Associates, P.A., we offer potential clients the opportunity for a no-obligation consolation.  We represent clients throughout the United States with Internal Revenue Service matters.

As a Tax Attorney, this is one of the most common questions I hear.  The next most common question is “if I pay just the tax can I avoid the penalties and interest?”

Generally speaking, the IRS will not settle for less than the full amount owed, except in an Offer in Compromise or OIC.  The IRS will settle for what they believe the reasonable collection potential is.  Simply put, this means they want an amount equal to the quick sale value of the equity in assets, plus, the amount they believe that they could collect over the next 4-5 years.

In order to settle with the IRS in an Offer in Compromise they must be convinced by your attorney that is more than they will receive if they don’t accept the OIC.

There are many firms that will make claims that they cannot meet, promising to settle your IRS debt for a very small portion of what you owe.  Many of these firms promise a settlement, then take your money and they should know that they can’t make an Offer in Compromise work.

In our office we do a careful analysis to see if our clients will qualify for an OIC.  Some people do, but many don’t.  We pride ourselves on giving honest advice to our clients and not putting people in Offers that have no chance of success.

The IRS announced in 2011 that it would ease rules on tax liens, so as to ease some of the financial burden of taxpayers. This may make the IRS sound kinder and gentler, but taxpayers should not forget that the IRS has a duty to enforce tax payments. A taxpayer having a hard time paying the tases might improve their chances of settling the debt if they first contact an IRS tax attorney.

When taxes aren’t paid, the Internal Revenue Service first sends the taxpayer a bill. If that doesn’t bring payment, a form letter is sent out, together with an invoice demanding payment. By the time this happens, interest and penalties have accrued, increasing the tax burden even more.

If the taxpayer still doesn’t pay, the IRS can file a Notice of Federal Tax Lien. This lien gives the IRS the legal claim to the person’s property as a payment for the debt. This lien is the first step to try to acquire all the money the taxpayer owes.

The tax levy is another step in the tax collection process. After receiving a thirty-day warning, the taxpayer is served with a Notice of Levy. Using this levy, the IRS starts to seize assets belonging to the taxpayer. The most common type of levy is wage garnishment, followed by the bank levy where money is taken out of the person’s bank accounts. Other vulnerable assets include homes, vehicles and 401k accounts.

Before paying the amount owed, it is best to consult a lawyer. The tax lawyer may be able to help settle for less than what is owed the IRS or can possibly get penalties removed (abated). With help from their attorney, the taxpayer will collect documentation, file tax returns and arrange for paying their tax bill, either as a lump sum or on an installment plan.

The attorney may also be able to obtain an abatement of penalties. There are several circumstances that could secure an abatement, including major family problems, illness or incarceration. Lengthy unemployment, bad advice from a tax specialist, or harm from an act of God are also reasons for an abatement. Those whose spouses have created a major tax liability can be helped to obtain Innocent Spouse Relief by their attorney.

Most taxpayers delay seeking the assistance of an IRS tax attorney. While they wait, penalties and interest keep growing. Liens and levies may start piling up, and their credit record gets shattered. Using a legal advocate will help you through these tax problems, and may even help you pay less than what’s owed.

OIC is a simple acronym that stands for “offer in compromise”. An offer in compromise refers to a type of agreement between the IRS and a taxpayer. When this type of settlement is agreed upon, the taxpayer pays less taxes than he or she originally owed. If the IRS believes the entire amount of taxes owed can be paid in full by the taxpayer, an offer in compromise deal will not be considered. The IRS also A taxpayer to pay the most they can reasonably pay, before accepting an offer.

Someone considering this type of settlement should remember that the IRS will usually reject an offer from a taxpayer if it is lower than the reasonable collection potential(RCP). This figure is arrived at by the value of the equity in the taxpayer’s property, cars, and bank accounts. It is one of the tests used to determine how much a person should be able to pay. The second is how much excess income a taxpayer has after deducting living expenses.

Taxpayers should be wary of scams and offers that advertise settling debts for extremely low dollar amounts. An OIC agreement is not likely to be that cheap, unless the person is really suffering financial hardship.

The IRS may only consider an OIC if there is considerable doubt that someone will not be able to pay the entire amount of taxes owed within the collection period. If there is doubt as to liability in the amount someone owes, the IRS may also consider an OIC. There can be doubt as to liability in many situations, such as if they can produce new evidence or show that an examiner failed to consider the taxpayer’s evidence.

Another situation in which an OIC may be accepted is if there are exceptional circumstances. This can be in the form of upcoming medical expenses or the expenses for an ill dependent child. Even if there is no doubt that the tax is correct and the person is liable, an OIC can sometimes be accepted if there are desperate circumstances that would cause economic hardships for the taxpayer.

If an offer in compromise is accepted, the taxpayer has options for repayment. They can choose to pay the settlement in a lump sum of cash, a short term payment plan, or a deferred payment plan.

An application for this type of settlement can be made by filing form 656 and paying the application fee. A typical application fee runs around $150. The first payment is often required when filing for this type of settlement.

Almost everyone needs help with taxes at some point or another. Often obtaining tax help is a yearly event. Those involved with paying a self-employment tax, business owners or business partners can benefit greatly by having some help with taxes. Taxpayers with odd tax deductions can also benefit from the help of a competent accountant or tax attorney.

A common area where people often run into trouble is with their self-employment taxes. Those who don’t work for a business, but are an outside contractor, your paychecks arrive without having any taxes taken out. Those who are self-employed are required to make estimated payments on a quarterly basis. At the end of the year they file returns and pay tax at a special rate for the self-employed.

Using a tax attorney can help you make sure you don’t get into tax trouble in the future. A tax attorney can also negotiate with the IRS on your behalf, so your payments aren’t overwhelming. By making payments throughout the year, it makes paying taxes more manageable.

Business owners find themselves in a unique tax position. They must not only pay the taxes on their own income earned from the business, but the business must also file tax returns for the business. This requires two different sets of returns to fill out. Getting someone to help you or show you how to do it right can help you avoid tax pitfalls. It’s easy to miss something when juggling these complicated taxes on your own.

Business partners have an even different set of circumstances to deal with. Business partnerships involve a completely different set of tax returns, filed on completely separate forms. It is especially helpful for business partners to use a tax attorney to make sure everything is filed properly with the IRS.

If a small business is taking deductions, they need to make sure to only deduct the proper amounts of the proper kinds of things. Some things, like mileage on a car, donations, and so forth can be tricky if not handled properly. Someone knowledgeable in tax law can help you make sure to put down the right deductions without adding something resulting in an audit.

Requesting help with taxes isn’t something to be ashamed of. Many of the wisest people have accountants working for them on a daily basis. Whether you are self-employed, a business owner, business partner, or just want help with your deductions, seeking out professional help can benefit you immensely.

Thinking about not filing your tax return because you don’t have the money to pay the tax liability? Don’t do that! The penalties for not filing are 5% per month for 5 months all by themselves. That constitutes a 25% penalty for simply not filing the return.

IRS penalties constitute a large portion of past due tax liabilities. They, together with interest, can soon equal or exceed the amount of the tax liability.

IRS Penalties are huge. Some of the most common ones are:

Late Filing
(If the tax return is more than 60 days late, the minimum penalty is the smaller of $100 or 100% of the tax owed.) 5% per month of the net tax due (maximum 25%)

Late filing due to fraud
15% per month of the net tax due (maximum 75%)

Late tax payments
0.5% per month of the unpaid tax due (maximum 25%) The 0.5% rate increases to 1% after the IRS issues a notice of intent to levy.

Negligence or disregard of tax rules and regulations
20% of tax underpayment

Fraud
75% of tax underpayment

Substantial understatements of income tax
(tax underpayments that exceed the greater of 10% of the correct tax liability or $5,000) 20% of tax underpayment

Recent statistics show that only about 20% of Offers in Compromise that are submitted are accepted. The rest are rejected. Why are so many OIC’s rejected? I believe that there are several reasons for the high rate of rejection.

There are many unscrupulous firms advertising on the radio, television and the internet that they can settle taxes for “Pennies on the Dollar”. Then, when desperate people contact them, they charge thousands of dollars and promise them settlements of only a small percentage of what the taxpayers owe.

After submitting an OIC for these people, and many months later they advise their client that the IRS has rejected their Offer in Compromise. In many of these cases, they never should have filed an OIC in the first place, because the client simply didn’t qualify for one. For more information about this shady business, please see our website: www.martellelaw.org/oic.html

What can a consumer do to protect themselves from these shady firms? I suggest that people contact the Better Business Bureau to investigate anyone they are planning on hiring.

Aside from hiring unscrupulous firms, there are other reasons why people have Offers rejected. In our office, we have identified a few main reasons for rejections.

When an Offer in Compromise is filed, taxpayers are required to file every tax return on time and pay every single tax that comes due after the filing of the Offer. Some people are just unable to stay in compliance and lose their OIC for that reason.

If a taxpayer’s financial circumstances change for the better, while they are in the Offer processing period, they might not qualify for an OIC due to too much income.

These reasons for rejection can be dealt with if a competent IRS law firm designs the OIC and assists the client in staying in compliance with the tax returns and payments to the IRS during the Offer process.

Our firm has a very high percentage of our Offers in Compromise accepted by the IRS. If you would like an honest, competent evaluation of whether you qualify for an Offer, please visit our website at: www.martellelaw.org/oic.html

This will provide an overview of bankruptcy discharge of taxes. It is important to learn the principles of tax discharge in bankruptcy if you represent clients with tax problems. This is a complicated area of law. The information provided below is only the basics of Bankruptcy Discharge of Taxes and should not be relied on for specific fact situations due to the nuances involved.

I. PRINCIPLES OF CHAPTER 7 DISCHARGE

1. The tax must be over three years old from when the return first came due.
a. Beware of extensions to file the taxes if you are filing after April 15, but before October 15. The tax comes due when the extension runs out.

2. Two years since the tax since the tax return was filed.

a. The tax return must have actually been filed by the taxpayer. Substitute for Returns filed by the IRS do not count.

3. Two hundred and forty days since the tax was assessed.

a. This issue often arises if there is an Examination and an assessment after the return has been filed.

4. Obtain and review tax transcripts to show your clients history

a. We always obtain tax transcripts when there are taxes involved. They will show whether a return has been filed, when it was filed and other necessary information.

5. Tolling events on the time periods. There are numerous events which will toll the periods required for discharge. They may include (depending on which principle they apply to):

a. Prior Bankruptcy
b. Offer in Compromise
c. IRS administrative appeals
d. These tolling events are complicated and research is needed to see if a particular event is applicable to individual cases.

II. ASSESSABLE BUT NOT ASSESSED

1. 11 USC 507 (a) (8) (A) (iii) provides that if a tax is not assessed, but is assessable, it is a priority tax. This usually occurs when Debtor has taxes which are over 3 years old. If the taxpayer filed the return between 2 and 3 years before the Bankruptcy Petition, the tax remains assessable until the tax is over 3 years old. (The IRS has 3 years from when the tax return was filed to assess the tax, with some exceptions). There may be a gap where the IRS can assess the tax and if so, the tax is assessable but not assessed. This may arise in a situation where the IRS is doing an examination of the taxpayers returns.

III. TAX CLAIMS IN BANKRUPTCY

The Internal Revenue Service in Chapter 11 and 13 cases will file a Proof of Claim breaking down their claim into Priority Claims, Secured Claims, and Unsecured General Claims.

1. Priority Taxes: Priority taxes are those taxes which do not meet the test for discharge. That is, they are:

a. Less than three years old, or;
b. Less than two years since the tax return has been filed,or;
c. Less than 240 days since assessment.
d. Payroll Withholding Taxes
e. Other Priority Taxes

2. Secured Tax Claim: If the IRS has filed a valid tax lien, the taxes subject to the lien may be treated as secured. In Chapter 11 or 13, the secured portion of the claim is only up to the value of the Debtors property. It should be noted that the security for the claim includes ALL of the Debtors property, without any deduction for the exemptions which the Debtor may otherwise claim.

3. Unsecured General Claims: This is the category that we try to fit as much of the tax as possible into. This category of tax is treated the same as any other general unsecured debt. That is, the IRS will receive its pro rata share of any dividend to unsecured creditors.

4. Payroll Taxes: The general rule is that Payroll taxes are trust fund taxes and are not subject to Bankruptcy Discharge. They are treated as priority taxes or secured if a tax lien has been filed. They must be paid through the Chapter 11 or 13 plan and are not subject to discharge in a Chapter 7. Priority Taxes are not paid interest in Chapter 11 or 13, however. Penalties are sometimes treated as unsecured. This favorable treatment often allows a Chapter 11 or 13 plan to deal with the taxes on a more favorable basis.

5. Sales Tax: If the sales tax a tax on the buyer, (it is in Idaho) it is treated as a trust fund tax which is not subject to discharge. In some states it is a tax on the seller and may be subject to discharge.

IV. Tax Liens and Bankruptcy

1. The rule in Chapter 7, where the taxes owed exceed the value of the Debtor’s property, that the lien may NOT be stripped down to the value of the debtors property.

2. The lien survives Bankruptcy and even though the tax might have been discharged, the lien remains on the Debtor’s property for its full amount. This creates a trap for the unwary.

3. If a lien is not released, it remains and attaches to all of the debtors property. The issue may arise years later. An example of how onerous this can be arises where a client has real property, there is a tax lien and a Bankruptcy is filed. In that situation, if the lien is not released and the property appreciates (not likely these days), or the Mortgage is paid down, significantly, the lien creditor (the IRS or ISTC) gains the benefit of the appreciation or principal reduction in the property value.

4. For a thorough discussion, holding that the lien is not stripped down to the value of the collateral see Dewsnup v. Timm 112 S.Ct. 773.

5. Methodology for dealing with Tax Liens:

a. Challenge the validity of an invalid Tax Lien.
b. Requesting a Certificate of Release from the IRS.
c. Negotiate a release for an amount to be paid.
d. Advise client to wait out the Statute of Limitations.
e. Liquidate the assets and pay the funds to the IRS.

V. OTHER BANKRUPTCY TAX ISSUES

a.Means testing does not apply to Tax Discharge matters.
b. Taxes are not Consumer Debt.
c. Taxes are involuntary.