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Tax Problem Attorney Blog

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Bankruptcy Appellate Panel Finds in Favor of the Taxpayer in Late-Filed Taxes Discharge Question

In the previous blog post we set forth the facts in a bankruptcy proceeding where the IRS argued that taxes filed even one day past assessment would result in the nondischargeability of the debt in bankruptcy. In this post we will examine the Bankruptcy Appellate Panel’s (BAP) analysis and issued guidance in the proceeding In re Kevin Wayne and Susan Martin, EC-14-1180-KuKiTa (9th Cir. BAP 2015).

Bankruptcy Court Found the Tax Debts Were Dischargeable

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The Internal Revenue Code and the Bankruptcy Code are each complex laws, but when they intersect things can get quite confusing, and seemingly inconsequential facts can have serious legal consequences. In a recent unpublished opinion, In re Kevin Wayne and Susan Martin, EC-14-1180-KuKiTa (9th Cir. BAP 2015), the Bankruptcy Appellate Panel (BAP) provided some guidance as to the effect the non-filing of a tax return or the filing of a tax return post-assessment can have on one’s eligibility for discharge through bankruptcy. While the court did not provide a bright-line rule, it did provide an explanation as to the applicable standards regarding what constitutes a “return” for purposes of a bankruptcy discharge. Taxpayers and their bankruptcy and tax attorneys can consider and apply the announced standard to gain a better insight into the impact their non-filing may have on contemplated bankruptcy proceedings. Of course the story may not be over, and the IRS may still appeal the BAP ruling.

Providing further clarity and a rejection of the harsh consequences imposed by a literalist approach and the IRS-advocated positions, the court also addressed a number of other arguments regarding the proper definition of a “return” and the analytical framework when determining a taxpayer’s eligibility for a bankruptcy discharge. In doing so the BAP rejected an approach that had gained favor in other courts. In doing so the BAP refused to follow other courts which had interpreted tax and bankruptcy law in a way which would make a tax debt nondischargeable whenever a tax return is filed even one day late. It also rejected the IRS position that once the IRS makes an assessment in the absence of a filed tax return that tax debt is non-dischargeable even though the taxpayer subsequently files a tax return.

The Taxpayers Failed to File Their Tax Returns for Multiple Tax Years

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One’s failure to understand the obligations and duties one holds under the U.S. Tax Code can always result in significant additional penalties and interest on any unsatisfied tax debt. Aside from these serious penalties, a proposed provision contained within the pending 2015 highway & transit funding bill, aka the Surface Transportation Reauthorization and Reform Act of 2015, would introduce new consequence on top of fines and penalties for certain taxpayers with “seriously delinquent taxes.” This new measure would permit the IRS to submit a list of individuals who are subject to non-renewal, cancelation, and restrictions on their U.S. passports.

The Bill has been passed by both the House, and the Senate, but there are still impediments to its final implantation. A provision in the bill authorizes the U.S. government to revoke, deny, or limit one’s U.S. passport if the person owes more than $50,000 in “seriously delinquent tax debt.” This $50,000 threshold includes all penalties and interest that may be added on due to a taxpayer’s failure to satisfy a tax debt that is due and owing. However, the tax enforcement provisions regarding the cancelation of one’s passport can only be utilized after the IRS has filed a lien or a levy against the taxpayer. The Bill provides that if the provision passes, it will go into effect on the first day of 2016.

Many groups are likely to be effected by these harsh potential new penalties. However, few groups are likely to be as affected as the 8 million strong American expatriates already grappling with FATCA and other offshore account compliance initiatives. Facing FATCA or other tax penalties and failing to address the matter before January 1st could lead to dire circumstances for expats due to potential passport cancelation. While the $50,000 threshold seems like it would be difficult to reach, penalties and interest can add up much more quickly than the average taxpayer would imagine.

Small Business
Small business owners are the dedicated and hardworking individuals that make our economy strong and our country great. On the whole, many small business owners lack the resources or processes and procedures to ensure that they and their company remains fully compliant with all tax obligations. Unfortunately for owners of small businesses, the IRS is aware of this fact and pursues small businesses and small business owners for perceived tax obligation failures aggressively.

The best advice for small business owners is to be particularly meticulous regarding one’s tax filings and, if applicable, foreign account disclosures under FBAR and FATCA. However, the acts by some small business owners are so egregious as to necessitate tax enforcement actions that can result in enormous fines and a potential federal prison sentence.

From Respected Communications Industry CEO to Tax Fraud Felon

IRS File Drawer Label Isolated on a White Background.
No taxpayer wants to receive news of a tax deficiency, tax audit, or other bad news from the IRS; however, it may turn out that the only thing worse than receiving bad news from the IRS is not receiving notice that you need to take action to correct a past tax filing or past tax mistake. Almost invariably, the longer a taxpayer takes to fix his or her underpayment of tax or outstanding tax bill the greater the amount of interests and penalties he or she is likely to pay. Thus, while it may be painful to receive notice of a tax lien or other adverse action by the IRS, not receiving the notice in a timely manner is worse.

Unfortunately for more than 24,000 taxpayers, a report from the Treasury Inspector General’s Office shows that problems in the tax lien process do occur.

When Can the IRS File a Tax Lien & What is Its Impact?