Tax Problems

Riverside, California Bankruptcy Attorneys
J.L. Borrie & Associates

Representing individuals and businesses in bankruptcy filings, Foreclosures and Tax Problem resolution throughout the Inland Empire area of Southern California, including Riverside, San Bernardino,, Redlands, Colton, Lake Arrowhead, Running Springs, Big Bear, Rancho Cucamonga, Fontana, Highland, High Desert, and Victorville.

This page will cover offers in compromise, lien and levy releases, negotiating payment terms on tax arrears, tax audits, discharging taxes in bankruptcy, and forcing tax entities to accept repayment plans in bankruptcy. However, before I get to those topics, a couple of warnings, and a tactical discussion are in order:

The first and most important tax rule is, don’t procrastinate. Generally the earlier you retain counsel in the collection, audit or assessment process, the better the results, and the lower the fees. You only make it more difficult to negotiate an out of court repayment plan by ignoring IRS notices, which many IRS employees take personally. Even worse, there are internal revenue regulations and laws which provide various minimum time periods the IRS must wait before taking the next step. We need this time to work out the agreement before they levy, seize property, or record liens. You may think an IRS lien is not so important if the taxes are not dischargeable in a bankruptcy, but if you later file a chapter 13 to force the IRS to take payments, if there is a lien, you must pay them interest. If no lien, you will probably not pay interest. If you need to get a loan to pay the IRS, your creditworthiness will decline, and the interest rate will go up if a lien has been recorded.

The second most important tax rule is, if you have, or may have tax problems, don’t talk to the IRS, EDD, FTB or any other tax agency, and don’t provide them with any information, without first consulting an attorney. Generally our clients never meet with IRS personnel. Also, keep in mind that the attorney client privilege protects your communications with your lawyer, but DOES NOT apply to accountants, or enrolled agents. These persons can be compelled to testify as to any conversation you have with them. Generally, you should never deal directly with a tax agency, and should always communicate through counsel. There are many reasons for this, a few of which are:

In the tax audit situation, auditors are trained to obtain all kinds of general information about you, your office procedures and personnel, in addition to their auditing duties. Their stated reason for this is to pin you down so that you cannot later change your story or fabricate a new one, and to obtain general information on how various industries operate. The problem with this, is they are asking you generalized questions, and you respond with conversational answers that they note down, which later become locked in stone, without the qualifying language you used, or meant to use, and then use it against you either for civil audit purposes, or potentially criminal prosecution.

An inadvertently incorrect answer to an IRS agent can potentially result in an attempted prosecution if they do not believe it was inadvertent, or accidental.

Though most IRS employees are reasonable and honorable persons, a few may not be, and may deliberately misconstrue your answers.

By dealing through a knowledgeable intermediary, where you never have any direct contact with the tax entity, you have additional time to fully consider, research, and think out your responses to unexpected questions and issues.

Information you give regarding assets you own, or existence and location of bank accounts, are used to facilitate levies and seizures against the property, when a tactically filed Chapter 7, 11, 12 or 13 Bankruptcy proceeding could prevent the levy or seizure. Even if it turns out you must pay the taxes, preventing them from seizing money you need to operate your business becomes very important. Even in repayment plans under the bankruptcy code, you may need the money to keep your business operating until you can reorganize your debt and restructure your business to a more profitable operation. Without money to operate, many businesses are doomed. Additionally, if a chapter 13 is later filed, and they have recorded a lien, you will be required to pay them interest on their secured claim, where if there were no lien, you probably will not have to pay interest. It is true that in certain circumstances we can recover property taken by the tax agencies once a bankruptcy case is filed, but it is extremely difficult to get cash back. Further, you may be without the property for some time before we can obtain a voluntary return, or forced return if court action becomes necessary.

If you are operating a business which generates accounts receivable, the IRS manual instructs all collection personnel to demand a list of your accounts receivables. They use the list you provide to levy the funds owed to you, which is then sent by your customers directly to the IRS. Once they have levied your accounts receivable, it is virtually impossible to negotiate an out of court payment agreement. Even if you then file an appropriate bankruptcy proceeding, it will take time for us negotiate a release of the levy, or obtain a court order for release, and in some cases, the court may not order a release of the levy. The levy may also create strained business relationships with some of your customers. DO NOT GIVE THEM ACCOUNTS RECEIVABLE INFORMATION. Generally, we will not give the IRS accounts receivable information until after we have a written repayment agreement, or have filed a bankruptcy proceeding.

Profit and loss information you provide is used to calculate minimum acceptable payment terms. Invariably you will underestimate expenses, and overestimate your ability to pay because you try to make it look like you are doing all you can to pay the obligation. It usually results in an agreement to pay too high of a monthly payment, and over the long haul will result in your defaulting on the terms. Once you default, the IRS generally will not work out future payment arrangements with you, and if that happens, the only way you can obtain payment arrangements is to force the tax entity into one under the repayment chapters of the bankruptcy code. Even if you retain us after providing income and expense information, it will be much more difficult for us to negotiate an out of court, reasonable payment arrangement.

I will now proceed to the law portion of this discussion, but please keep in mind that this area of the law is complicated, and subject to many ifs’ ands’ and buts’, so do not attempt to use this information in a literal sense and apply it to your situation to attempt self help. Recently I have had some clients tell me they went to general practice attorneys in the area who told them to consult me to find out answers to questions they didn’t know, and then to come back to the inexperienced attorney on the theory that he would charge less to do the work. Nothing could be further from the truth. My hourly rate may or may not be higher, but experience generally results in the matter being concluded in less time, and knowing when to negotiate, and if and when to fight, is very important. We all have heard of cases where winning costs as much or more in fees than the amount in dispute. The trick is to avoid it happening to you. More important, it is rare where the answer to a few difficult questions at the beginning of a case determines the outcome. Usually it is a continuing process of developing issues and solving problems efficiently during the entire process. In out-of-court workouts, the overall knowledge and negotiating abilities of your representative is most important. If you do not like, trust and understand your attorney (in other words he speaks in everyday English and not legalese non answers) it is likely the IRS employee won’t either, so your case becomes unnecessarily adversarial, which translated usually means more expensive and poorer results.

Keep in mind, the following information is of a general nature only, and intentionally does not give detailed specific information in an attempt to prevent someone from getting into trouble by attempting to use the information without a specific case review by an experienced practitioner.

Dischargeability Of Taxes In Chapter 7 Bankruptcy Cases

The dischargeability of taxes in a Chapter 7 proceeding can become quite technical, and there is a many prong test, all conditions of which must exist, before the taxes can be discharged:

• First, there is a minimum number of years that must have passed from the date the tax return was due (not filed) INCLUDING ANY EXTENSIONS, AND you must have actually filed a return a minimum time period prior to the filing of the bankruptcy (estimated returns prepared by the IRS do NOT count), and
• The liability must not have been assessed within 240 days of filing the bankruptcy, and if an offer in compromise has been made, all time while the offer in compromise was pending is tolled plus a short extension period is added; and
• There was no fraudulent return or willful attempt in any manner to evade or defeat the tax.
• Withheld payroll taxes, sales taxes, and other trust fund taxes are generally NEVER dischargeable in a bankruptcy, but the tax entity can be forced to take payments, and many times without accruing interest.

Even if taxes are discharged, if the tax entity has a lien on property when the case is filed, the lien generally survives the bankruptcy EVEN if the personal liability on the taxes is discharged.

The above time periods are tolled during the pendency of any prior bankruptcy case, or when assets have been in the control or custody of any court of the United States, and for an additional six months. There are also tolling provisions when an offer in compromise has been made. Unfortunately there are several bankruptcy and tax practitioners lacking in knowledge of this, who are instructing clients to file a chapter 13 until the required time period has passed to discharge taxes in a chapter 7, thinking they can convert or dismiss and re file a chapter 7 to discharge the taxes. It doesn’t work because all time while the Chapter 13 is pending is tolled, and an additional 6 months is added to the time. And once the chapter 7 is filed, unless you can convince the court to dismiss the case, you have now lost your right to file a chapter 7 for another 6 years so you can’t wait out the dischargeability period.

Repayment Of Taxes In Chapter 13 And Chapter 11 Proceedings

Generally you can spread out the repayment of non dischargeable taxes over a five year period in a Chapter 13, and generally, interest stops on the filing of the Chapter 13 petition. Provided your Chapter 13 plan meets certain technical requirement, neither the IRS nor any other taxing agency has grounds to contest or object to the plan. Immediately upon filing the petition, the court issues a restraining order called an Automatic Stay which prevents the IRS, other taxing agencies, and all your other creditors, from taking any action to collect the obligations. That means no levies, liens, seizures, nasty letters, telephone calls, or any other attempts either directly or indirectly to obtain payment. In Chapter 13 plans, you generally do not pay interest if a tax lien has not been filed before the Chapter 13 was filed. For additional general information on Chapter 13 plans, and how your other debts fit into the plan, review the Chapter 13 Bankruptcy page. Chapter 11 Bankruptcy cases are similar except you can generally stretch repayment to tax entities over a six year period whether they like it or not. If they agree, the repayments can be stretched out even longer. However, generally interest must be paid as part of the repayment plan.

Tax Liens

No matter how much you don’t want to deal with the IRS, no matter how much of a procrastinator you may be, no matter how busy you are, no matter what the reason you have not earlier dealt with the problem, look at the notice of filing of tax lien as a last reminder that you may still have time to resolve the problem without a disruption in your business or personal affairs. The recording of a tax lien is the opening shot in the tax entities serious collection efforts. Unless dealt with timely, the next contact you will receive will be bank account levies, payroll garnishments, property seizures, and an IRS agent at your door. If you have rentals, they may contact your tenants and demand the rent be paid to the IRS, and not you. If you have accounts receivable, they may levy them which requires your account debtors to pay the IRS instead of you. Makes it a little hard to pay the underlying debts on the rentals, or your other obligations, but that isn’t the IRS’s problem.

If you cannot pay the lien amount in full within 30 days, I strongly suggest you immediately retain someone to make an offer in compromise or installment agreement. If for some reason these attempts are unsuccessful, you should consider a bankruptcy court enforced repayment plan in either a Chapter 11 reorganization, or Chapter 13 repayment plan.

Offers in Compromise

This is one of the most misunderstood areas of tax practice, and many OICs’ are filed with absolutely no chance of success. The formula the IRS uses to decide whether to accept an OIC is public record, and though you can never know in advance for sure whether an offer will be accepted, unless the offer comes close to the IRS formula, it is almost for sure doomed to failure. And though a turn down does not prevent you from re filing another OIC, it does seem to have a prejudicial effect on a later consideration of a different offer. For those of you who do not know what an officer in compromise is, it is simply an offer to the tax entity to pay a smaller sum than due, either in a lump sum, or sometimes in a short payment plan, in full satisfaction of the entire obligation. In order to properly prepare an offer in compromise, it is necessary to analyze your current net worth, and your earning ability and allowed expenses, over a several year period. Common sticking points arise when your expenses are more than those the IRS obtains from local and national averages, and their common refusal to take into consideration, unsecured obligations you have.

Negotiating Payment Terms - Installment Agreements

There is no secret formula on determining how much and whether the IRS will work out a payment arrangement. Basically it is a give and take negotiation based on your ability to repay, and if you are in business, it is heavily influenced by whether you are remaining in business. One of the cardinal rules is that we must convince the tax entity that you will not fall further behind in payroll taxes once the negotiations have commenced. If we can persuade them that the business is viable, and you have the ability to begin making the current tax deposits, we can usually work out payments in an amount that you can afford. If we are dealing with non business taxes, a big area of contention is payments you owe on unsecured debts, the IRS may take the position that payments to unsecured creditors is not an allowable expense in determining the monthly payment, or your particular expenses may be higher than their based on local or national standards. Because of our extremely heavy experience in bankruptcy repayment plans, we know what a court will force the IRS to take if it becomes absolutely necessary to file a court proceeding, and provided we meet certain requirements, the tax entity doesn’t even get to vote or object to a bankruptcy repayment plan, and they know we can do it, so we may be able to use this a further leverage to obtain a reasonable payment.

Lien Subordination And Levy Releases

If you are attempting to refinance your real property and there are recorded tax liens, you will not be able to complete the refinancing unless either there are enough loan proceeds to entirely pay off the tax lien, or you obtain the tax entities consent. Getting that consent takes several weeks, and sometimes months, so you must start as soon as possible. If you have an all due and payable deed of trust, try to get the lien subordination accomplished prior to the trust deed due date. If a foreclosure has already been started, keep in mind the foreclosure sale generally takes three months and three weeks or longer. Additionally, a lien forbearance by the IRS generally requires that you receive no proceeds from the loan, and only senior liens to the tax entity are paid.

Some wage levies will be withdrawn or reduced once we have contacted the IRS and advised them we are in the process of preparing an installment agreement. Other times, the wage levy won’t be withdrawn until after we have worked out an installment agreement, or filed a bankruptcy proceeding, so it is important to move as rapidly as possible in preparing the installment agreement.

Now, in regards to our fees for tax problem resolution, we offer a free conference with a very experienced bankruptcy - tax problem senior attorney, not a junior associate or paralegal, provided you mention this web page. Otherwise you will be charged a consultation fee. In most instances, we are willing to work either on an hourly basis, or on a flat fee retainer, whichever you prefer, however there are some activities which we cannot agree to do on a flat fee.

We offer a free conference of up to one hour with an experienced (a minimum of 10 years) bankruptcy, tax problem, foreclosure and debt resolution attorney (not a junior associate or paralegal) who will fully analyze your specific financial situation, and advise you as to your available options, likelihood of success, and the costs and procedures involved in each alternative.

If you would like someone to contact you regarding your problems or concerns, please choose the appropriate choice below, or call us at 951-686-6432 and mention that you visited our web site for a free, no-obligation conference.