Bankruptcy questions RE: non-filer taxpayer

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Subject Author Date Bankruptcy questions RE: non-filer taxpayer Cathy 01-10-2007  Re: Bankruptcy questions RE: non-filer taxpayer L K Williams 01-12-2007  Re: Bankruptcy questions RE: non-filer taxpayer Phil Marti 01-12-2007  Re: Bankruptcy questions RE: non-filer taxpayer David Gresham 01-12-2007
Posted by Cathy on January 10, 2007, 9:38 pm Please log in for more thread options Taxpayer is being forced to file for Chapter 7 bankruptcy due to a case of identity theft (he tells me that the courts are so backlogged with these cases that unless he can PROVE who it was - he does know who it was, but cannot PROVE it was her), he is SOL). So, he is being forced to declare Chapter 7. He has not filed income taxes for several years - potentially since 1990 or thereabouts. He owned and operated a small engine repair shop for probably 5 years and generally has just worked for whomever would pay him cash in the other years. Lifestyle of this guy would only require $6,000 - $7,000 to survive for a year (house payment of $125, no vehicle payment, etc). I am working on preparing last 3 years returns (2003, 2004, 2005), based upon bank statements and some have no check images, so it is a difficult task. Questions: 1. I've gotten through the bank statements. I'm quite sure there is plenty of cash received in this business and based upon the fact that he never wrote many (if any) "draw" checks to himself, I feel we should add in some cash as income for good measure. Any thoughts about doing this? I am basically taking the approach that checks written for less than $50 are for personal expenses and we'll do what we can with the other checks. Lots of his records have been destroyed (by ex-girlfriend who apparently "stole" his identity), so the bank statements, with check numbers and amounts is what we are limited to for some of the time frame - I do have one check register for 18 months' time! I believe he will owe SE tax for at least 2 of these 3 years, but income tax is questionable. I'm guessing his SE income to be around $6,000 - $7,000 (enough for him to survive on LOL) 2. Regarding the bankruptcy: Do I understand the rules correctly that prior years' taxes will NOT be priority claims (and thus be discharged)? According to information I have, income tax debt has to meet one of 3 conditions to be considered priority: 1) The due date of the tax return, including valid extensions, must fall within the 3-year period immediately preceding the filing date of the bankruptcy petition; 2) The tax return must have been filed within the 2-year period immediately before the filing date of the bankruptcy petition; OR 3) The tax must have been assessed within a 240-day period before the filing date of the bankruptcy petition. Does this mean that all income taxes from those years of nonfiling would be discharged? I briefly discussed this with the taxpayer's attorney, but I didn't feel that I we were communicating on the same page. Someone also has mentioned to me that we need to pull a transcript on the taxpayer. Do these non-filed years then get included in the list of debts to be discharged? Can someone either direct me to information on the web that will help explain this more or provide me additional insights here? I have been instructed by the attorney to forward the 3 years returns to his office and he will forward them on to the IRS - I know that neither I nor the client will be the ones mailing the returns to the IRS. Thanks for any additional guidance, input and blessings that anyone may provide! The preparation of these tax returns is messy enough - let along interjecting the bankruptcy issue into the situation!!! BTW - taxpayer is coming clean and on a payroll as of 1/1/07 complete with federal and state withholdings!! Thanks Cathy in Kansas << ======================================================= >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2006) - All rights reserved. >> << ======================================================= >> Posted by L K Williams on January 12, 2007, 2:47 am Please log in for more thread options You could try to reconsruct his income on the net worth formula. Figure out how much his life-style cost - what did he pay for rent, groceries, clothing, etc. - and add/subract any net change in bank balances and cost of other assets. I've used this method before and IRS has never complained. I am not an expert on bankruptcy issues but I don't think any of these taxes are dischargeable. Only unpaid taxes that have aged according to the rules can be discharged. Lanny K. Williams, CPA Nawarat, Williams & Co., Ltd. Income Tax Services for Expatriate Americans << ======================================================= >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2006) - All rights reserved. >> << ======================================================= >> Posted by Phil Marti on January 12, 2007, 2:47 am Please log in for more thread options > 2. Regarding the bankruptcy: Do I understand the rules > correctly that prior years' taxes will NOT be priority > claims (and thus be discharged)? You don't understand the rule, which is quite simple. No return filed more than 2 years before the bankruptcy petition, no discharge. 11 USC section 523 (a)(1) -- Phil Marti Clarksburg, MD << ======================================================= >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2006) - All rights reserved. >> << ======================================================= >> Posted by David Gresham on January 12, 2007, 2:47 am Please log in for more thread options > Taxpayer is being forced to file for Chapter 7 bankruptcy > due to a case of identity theft (he tells me that the courts > are so backlogged with these cases that unless he can PROVE > who it was - he does know who it was, but cannot PROVE it > was her), he is SOL). So, he is being forced to declare > Chapter 7. > > He has not filed income taxes for several years - > potentially since 1990 or thereabouts. He owned and > operated a small engine repair shop for probably 5 years and > generally has just worked for whomever would pay him cash in > the other years. Lifestyle of this guy would only require > $6,000 - $7,000 to survive for a year (house payment of > $125, no vehicle payment, etc). > > I am working on preparing last 3 years returns (2003, 2004, > 2005), based upon bank statements and some have no check > images, so it is a difficult task. > > Questions: <snip> > 2. Regarding the bankruptcy: Do I understand the rules > correctly that prior years' taxes will NOT be priority > claims (and thus be discharged)? > > According to information I have, income tax debt has to meet > one of 3 conditions to be considered priority: Actually, and fwiw, I am not a Tax Expert or Lawyer: I believe all three conditions have to be met for Chapter 7. I think prior to the Bankrupcy reform act Chapter 13 was a little less restrictive, but now all of these tests have to be met. > 1) The due date of the tax return, including valid > extensions, must fall within the 3-year period immediately > preceding the filing date of the bankruptcy petition; > > 2) The tax return must have been filed within the 2-year > period immediately before the filing date of the bankruptcy > petition; OR > > 3) The tax must have been assessed within a 240-day period > before the filing date of the bankruptcy petition. > > Does this mean that all income taxes from those years of > nonfiling would be discharged? I briefly discussed this > with the taxpayer's attorney, but I didn't feel that I we > were communicating on the same page. Someone also has > mentioned to me that we need to pull a transcript on the > taxpayer. Do these non-filed years then get included in the > list of debts to be discharged? Can someone either direct > me to information on the web that will help explain this > more or provide me additional insights here? If you filed now without filing any returns none of this would be dischargable. And you have to file all years for a Chapter 7 before they can be included in Bankruptcy. << ======================================================= >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2006) - All rights reserved. >> << ======================================================= >> Similar Threads Posted Jackson Hewitt client, December bankruptcy, necessity of bankruptcy estate? 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