Bankruptcy questions RE: non-filer taxpayer


C

Cathy

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
 
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L

L K Williams

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
 
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P

Phil Marti

Cathy said:
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)
 
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D

David Gresham

Cathy said:
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:
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.
 
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