One of the most important documents we need in order to file your bankruptcy are copies of your tax returns for the last 4 years. We must have both federal and state. If you cannot find your tax returns, check with your tax preparer or ask the IRS or State for a copy of your returns. You may order a tax transcript online from the IRS website. Transcripts are free and you can get them for the current year and the past three years. You can download and print your transcript immediately or request the transcript be mailed to your address on record.
After filing Chapter 13 bankruptcy, you should confirm with your attorney whether the monthly mortgage payment is to be paid by you or the Chapter 13 bankruptcy Trustee. Often the mortgage payment is included in your monthly Chapter 13 payment and disbursed to the mortgage company by the Chapter 13 Trustee. Regardless of how the monthly payments are made to the mortgage company, you are eligible to deduct interest paid on your loan if you itemize your deductions on your tax return, and the mortgage interest meets the requirements established by the Internal Revenue Service. The same holds true if the property insurance and taxes are escrowed in your mortgage payment or whether you pay them directly to your insurance agent and city and county tax collector. They should be eligible for deduction on your taxes.
The mortgage company should continue to send you the Form 1098 Mortgage Interest Statement which will list the mortgage interest, insurance premiums and real estate taxes paid to them for the tax year. This will only include taxes and insurance if they were escrowed in your monthly payment. If you do not receive Form 1098 by early February following the tax year, you should contact the mortgage company and request they send the form to you. The information on Form 1098 is the same information the mortgage company provides to the Internal Revenue Service regarding your loan.
When you file for a Chapter 13 bankruptcy, there may be a chance you could end up owing taxes over the three to five years that you are in the bankruptcy. If you do happen to owe taxes while in a chapter 13 bankruptcy, the IRS or State that you owe may file a proof of claim. This is a legal document that states how much you owe a creditor. Depending on the amount you owe, the bankruptcy Trustee may need to increase your payments. The amount that the payments would increase depends on how much you owe.
In a Chapter 13 bankruptcy, taxes owed are paid back in full. Depending on what you end up owing, your payments could end up needing to be increased to ensure you pay back everything owed in taxes before your bankruptcy is closed. Your attorney and the Trustee will typically work this out and let you know what the payments will end up being.
To ensure the greatest chance of success in your Chapter 13 bankruptcy you should be sure you try to fix your deductions so you are breaking even each year. Ideally, you don’t want to get a large refund each year (the Trustee could take this if you do) and you don’t want to owe each year because that could cause your monthly payments to increase to an amount more than you can afford within your Chapter 13 bankruptcy.
So what’s the bottom line? Fix your deductions so you don’t continually owe more in taxes over the course of your bankruptcy. If you do owe, contact your attorney and they can work with the Chapter 13 Trustee and the taxing agency to try to ensure you can stay within your Chapter 13 bankruptcy.
The Internal Revenue Service (IRS) uses a basic logic that if you have any signing authority over the business bank account, then you can be held personally responsible for certain taxes owed by that business. So, yes, if you own a business or part of a business, be prepared to pay certain accrued taxes. This is especially true if you have a sole proprietorship. Additionally, no matter what type of business you own or owned, you also need to be careful when it comes to taxes that you should have paid as an employer – for example, the necessary taxes you pay to the government for your employees (social security, etc.). These can later be assessed as “civil penalties” which you are personally responsible for, even if the business later dissolves.
The general rule when it comes to taxes is that the government – state or federal – almost always gets paid.
What if you have dissolved the company? Unfortunately, dissolving a business will not eliminate any tax debt or liability. Even filing bankruptcy will not take care of all taxes. Generally speaking, the only time taxes may be wiped out in a bankruptcy is if they were filed three years prior to the bankruptcy filing date. The civil penalties mentioned above are also taxes that you can be personally responsible for even if the business has been dissolved.
If you owe a large amount to the government for taxes and are having a hard time coming to terms for a payment plan with the IRS, you may want to look into filing a Chapter 13 bankruptcy, which is a structured repayment plan. This will keep the penalties from accruing and enlarging your original balance owed.
If your business is still operational, you may look into reorganizing your business debt in a Chapter 11 bankruptcy.
The bottom line is that even though you can still be held personally responsible for certain business taxes, you are not limited to repaying your taxes outside of bankruptcy. Certain types of bankruptcy may actually be a better alternative for you when it comes to setting up a repayment plan.
You will notice when you are filling out your paperwork that the court asks you for what seems to be a billion pieces of documentation ranging from copies of bills, papers from purchases, income advices and federal and state taxes. These documents are asked for to verify information you are providing is true and accurate.
However, what happens if you haven’t filed your taxes? Can you still go through the bankruptcy process or must your taxes be done beforehand? The answer is you must have all prior tax years filed and received by the IRS and state in order to file the bankruptcy. There are several reasons why taxes are required to be filed and received before filing your bankruptcy.
The Bankruptcy Trustee, Bankruptcy Court and Bankruptcy Administrator Require It
As your attorney, are required to send a copy of your most recent tax year to the bankruptcy Trustee. If they do not get the taxes before the 341 creditor’s meeting then they technically has the right to dismiss your case. When April 15th (or the appropriate deadline depending on the year) hits, the bankruptcy Trustee will expect taxes to be filed as completed. What if you’ve received an extension? Even if you have received an extension, if you are filing bankruptcy you need to file the taxes before filing for bankruptcy. This does not mean you have to pay on taxes owed but they at least need to be filed.
The Bankruptcy Administrator’s office randomly elects cases to audit. They do this to ensure bankruptcy lawyers are performing their duties but also to ensure clients are providing accurate information. It is similar to being audited by a taxing agency. If your case is randomly selected to be audited then we are required to provide those documents.
Taxing Agencies Want to Ensure Taxes Are Completed
In addition to the bankruptcy Trustee and bankruptcy court needing to see evidence of your tax filings – the taxing agencies, the Internal Revenue Service and the North Carolina Department of Revenue, also will receive notice of your bankruptcy filing and want to make sure information you are reporting is accurate. Once they have word that you have filed a bankruptcy they will reassess your prior year’s taxes to make sure they are completed. If they are not, they can object to your discharge until they have been completed. If a creditor, such as a taxing agency, objects to your discharge it means your case will be held open longer. The longer your case is open, the longer it takes to get your financial freedom.
Filing Taxes Allows You to Accurately Budget Repayments
Just like any other debt you have in your bankruptcy – the amount owed for taxes has an impact on your bankruptcy filing. If you have not filed your taxes, and you are filing a Chapter 7 bankruptcy, then you have no way of knowing what you owe, and cannot go ahead and budget a repayment plan going forward. If you file a Chapter 13 bankruptcy, and you have not filed taxes yet, then the IRS or NCDOR is going to estimate what you will owe them and file a Proof of Claim for un-assessed returns. Oftentimes, the taxing agencies file the proof of claim as a worst-case scenario on your taxes, which typically, means the amount is overstated which can cause an increase in your Chapter 13 plan payment. If you file your taxes then the IRS can use the amount of taxes owed to file a more accurate proof of claim, which may increase your chances of success in a Chapter 13 bankruptcy.
The bottom line is, yes you have to file your taxes before filing your bankruptcy. We understand that it’s a pain to have to dig through your paperwork, retrieve the documents, make copies and bring them to us, but the government requires it as part of your bankruptcy documentation.
When you file bankruptcy, your bankruptcy attorney will request to have a copy of the last 4 years of tax returns. Why? It is among the documents required by the federal bankruptcy courts. Your tax returns reveal a good bit of information about transactions and assets that would be pertinent to the preparation of a bankruptcy petition. Plus, before you file bankruptcy, you are usually required to have all taxes filed. Many of us file our taxes electronically and don’t think to print them out. After so much time has gone by you may not have easy access to your returns anymore. Or if you go through a tax service, they may charge certain fees to provide duplicates. So if you fall into one of these categories or perhaps your records aren’t exactly impeccable, all is not lost. You may request transcripts from the IRS for taxes as far back as 10 years ago. These transcripts are free, but they are also only recaps and not full returns. The transcripts are okay for our purposes. However, the Trustee will not accept a recap transcript for the most recently filed year. There is a fee to get a copy of the full return.
There are 4 ways to obtain transcripts from the IRS: mail, fax, call, or automated.
Fax and Mail: You may fill out a simple form: 4506-T Request for Transcript of Tax Return or 4506 Request for Copy of Tax Return. For 1040 series, W-2s, and 1099 forms, if you decide to manually fill out the form, you may then fax it to 859-669-3592 or mail it out to: RAIVS Team, P.O. Box 145500, Stop 2800 F, Cincinnati, OH 45250. All other requests for transcripts may be faxed to 816-292-6102 or mailed to: RAIVS Team. Stop 6705 P-6, Kansas City, MO 64999.
If calling is more up your alley, you may contact someone at: 1-800-908-9946.
The easiest, most efficient way is using the automated self-help tools at IRS.gov. Click on “Order a Return or Account Transcript.” Be prepared to answer some personal information questions. Then just follow the directions!
Do you owe income taxes to the Internal Revenue Service (IRS) or State of North Carolina (NCDOR)? If so, you may find that you have an income tax lien filed against you. There are two ways to confirm whether a tax lien has been “perfected” or filed with the Clerk of Court in the county you claim as your residence.
First, you can go to the Clerk of Court’s office in the county you live. The Clerk’s office is most likely located inside the county courthouse. Ask to speak to someone in the civil filing department within the Clerk of Court’s office. Explain to the clerk at the desk or window that you need to determine if you have a tax lien filed against you. The Clerk of Court’s staff is usually extremely helpful and will assist you with your research to determine if a tax lien has been filed against you. If you determine there is a lien filed against you, we recommend you obtain a copy of the lien paperwork, since it will specify which tax years are included in the lien. In many cases you may owe taxes for several years’ but only select years are included in the tax lien. It is highly recommended that you bring cash with you to the Clerk of Court’s office, since they may not accept a check, credit card or debit card to pay for copies of the tax lien paperwork.
The other option for determining if you have a tax lien filed against you is to contact the IRS or NCDOR and inquire if they have a tax lien against you. If they do have a lien filed against you, ask that they provide you with a copy of the paperwork. The copy may be provided to you free of charge or there may be a nominal fee, but it may take several days to obtain a copy of the lien through the U.S. Postal Service.
A perfected tax lien, one filed with the Clerk of Court within the county you live, attaches to both your real and personal property. In other words, the tax lien will attach to your home, cars, bank accounts, etc. As a result, it is extremely important to determine if you have a tax lien prior to filing bankruptcy. The amount of taxes you owe to the IRS or NCDOR, and the existence of a tax lien, will impact the type of bankruptcy that is best suited for your needs and it will directly impact your monthly payments in a Chapter 13 bankruptcy. Checking for a tax lien is time well spent, especially if it saves you money in your bankruptcy!
With limited exceptions, most Americans are required to file tax returns with the Internal Revenue Service, and if you work or live in North Carolina, the North Carolina Department of Revenue. If you do not file and pay your taxes on time each year, you will incur penalties and interest on the amount of money you owe the tax entity. Initially, the tax entity will likely work with you to establish a payment plan for the taxes you owe. However, if you make no effort to contact and work with the taxing entity, do not be surprised if a lien is placed against all of the property you own or your wages are garnished through a tax levy.
First, let’s discuss the difference between a tax lien and a tax levy.
A tax lien is a security interest against your property. The IRS records a tax lien with the clerk of court in the county where you live. The lien is on all real and personal property you own including your house, car, bank accounts, clothing, household goods, etc. As a result, you will be unable to sell your home, car or other possessions without first obtaining a release from the IRS. In other words, the IRS will now allow you to sell your house and make a profit without being paid at least a portion of the debt that is owed to them.
A tax levy is a legal seizure of your property to satisfy a tax debt. With a tax levy, the IRS can seize and sell your house, car or other assets. They can also seize your bank accounts, retirement accounts, state tax refunds and other assets. They can also garnish wages.
By filing bankruptcy, you may be able to eliminate some of the tax debt and stop a wage garnishment while in an active bankruptcy. If you file a Chapter 7 bankruptcy to eliminate credit card, medical bill and other consumer debt, the wage garnishment will stop while you are in the bankruptcy but may resume once the bankruptcy is complete and if taxes are still owed. In certain situations, amounts owed on taxes that were due more than three year ago may be eliminated in a Chapter 7 bankruptcy. Unfortunately, if a tax lien is placed for the older tax years the tax debt may be eliminated BUT the lien is still in effect. As a result, you may still be required to pay the taxes if you sell your house or car in the future. As a result, you should contact the IRS and State of North Carolina and request a copy of any tax liens prior to filing bankruptcy.
You may want to consider a Chapter 13 bankruptcy to restructure your tax debt and pay the taxes over the course of three to five years. If you decide to file bankruptcy to restructure your tax debt, it is very important you determine whether there is a tax lien before the bankruptcy is filed. The existence of liens will impact the amount owed in the bankruptcy and will directly impact the monthly payments in a Chapter 13 repayment plan.
Tax liens and tax levies are the IRS’ and State’s way of ensuring taxes are paid by the majority of their citizens. If taxes are owed, it is best to work with the IRS and state proactively to avoid tax liens and levies. However, should you find yourself with a lien or levy, you may want to consider bankruptcy to restructure the payments.
There are two types of tax liens: property tax lien and income tax lien. Both liens have an impact on your bankruptcy, but the treatment may be different. The treatment is also dependent upon the type of bankruptcy you file, Chapter 7 bankruptcy or Chapter 13 bankruptcy. In this blog, we will discuss how a property tax lien is handled in your bankruptcy.
If you own real or personal property, the city or county in which you live will most often levy taxes based on the value of the property.
Real property includes houses, condominiums, townhouses, land, etc. Taxes on real property is a lien and attaches to the property. As a result, the taxes must be paid in full or the city or county taxing entity may foreclose on the real property. In almost all jurisdictions, the city or county tax lien is in first position to be paid and even has priority over the first mortgage on the property.
Personal property includes automobiles, motorcycles, trailers, assets of businesses, etc. Taxes on these items are a lien on the assets themselves, but in most jurisdictions, the lien can be attached to any real property you own as well.
Now that there is a general understanding of what is included in real and personal property, let’s understand the impact bankruptcy has on these taxes. It is important to understand that property taxes cannot be discharged in bankruptcy and that you are legally responsible for the taxes until the asset is no longer in your name.
Chapter 7 Bankruptcy:
If you are filing a Chapter 7 bankruptcy, you will be held responsible for any taxes that have been assessed against you. If you are surrendering a house in a Chapter 7 bankruptcy, the taxes will be assessed against you for as long as you are the legal owner of the property. The property legally belongs to you until it is conveyed to a new owner by purchase, foreclosure, deed in lieu of foreclosure, quit claim deed, etc. Although these taxes are assessed against you, often it is not necessary to pay them since the taxes are a lien on the property and will be paid at the time the property is conveyed to the new owner. For example, if the house is surrendered in bankruptcy, the taxes will be paid by the mortgage company when the property is foreclosed on. If you are surrendering a vehicle in a Chapter 7 bankruptcy, you will incur taxes until the taxing entity has noted you are no longer the owner of the property. You should contact your local taxing authority to determine the proper procedure for notifying them that you are no longer the owner of the vehicle. In some cases this means surrendering the license plates on the vehicle or it may means showing that the title of the vehicle has been legally transferred to another person or entity.
Chapter 13 Bankruptcy:
If you are filing a Chapter 13 bankruptcy, the taxes on real or personal property owed on the date of bankruptcy filing will be included in the Chapter 13 bankruptcy payment. This would include any taxes due and payable as of the date you file bankruptcy. For any taxes incurred after the date of bankruptcy filing, you will need to pay those taxes directly to the taxing entity; they will not be paid in your bankruptcy. For example, if you have not paid last year’s $200 personal property tax assessed on your vehicle, it will be included in your monthly Chapter 13 bankruptcy payment. However, any taxes assessed in the future will be your responsibility, and you should make a direct payment to the taxing entity. The same would apply to taxes due on a house or land if the taxes are not escrowed into your monthly mortgage payment.
You should speak with your attorney to clarify any questions regarding tax liens and tax payments on real or personal property.