Chapter 12 farm bankruptcy helps family farmers to keep their farms.  It allows family farmers to reorganize their finances and operations. Chapter 12 was originally enacted by Congress in 1986, and was made permanent in 2005.  It helps the farmer and the banker to sit down and work out alternatives for debt repayment.

But according to Senator Charles Grassley, recent IRS actions are threatening family farmers’ ability to properly reorganize in Chapter 12.  Grassley authored a provision which is supposed to allow farmers in Chapter 12 to sell some of their property without having to pay capital gains taxes to the IRS in full.  The provision, enacted in 2005 as 11 USC 1222(a)(2)(A) was intended to make capital gains taxes into unsecured claims (often paid at only a percentage of the total) rather than priority claims (required to be paid in full).

The US Supreme Court heard arguments on November 29^th in the case of Hall v. United States.  The IRS argued that capital gains taxes created by the sale of property during a farm bankruptcy proceeding are payable in full as an administrative expense under the Chapter 12 reorganization plan.  Although the 8^th Circuit in Knudsen v. IRS, 581 F.3d 697 (2009) rejected the IRS position and said there was an exception preventing the IRS having a priority claim on post petition claims, the 9^th Circuit agreed with the IRS position in deciding the Hall case (617 F.3d 1161 (2010)).

Grassley recently went onto the floor of the Senate to create a record of what the Congressional intent was in enacting section 122(a)(2)(a).  Grassley said the IRS position meant that a farmer couldn’t sell a portion of his farm to reorganize, pay creditors and become profitable again.  “Why should the IRS be allowed to veto a farmer’s reorganization plan?” Grassley asked.

“High taxes have caused farmers to lose their farms”. said Grassley, who believes that family farms are very important to the economic viability of rural  America. 

The policy reasons for this section of the farm bankruptcy law were that the farmers didn’t have enough money to pay everyone.  It would be better to allow them to sell some assets, which would generate cash and help them reorganize, keep farming and pay their creditors.  Congress, Grassley says, realized that someone would have to make a sacrifice and they decided to give farmers a break from government taxes in a very narrow set of circumstances.  The creditors that the IRS are trying to get ahead of are small businesses, suppliers and small local banks that extend credit and supplies to farmers according to Grassley. 

Grassley’s efforts on behalf of family farmers has made Chapter 12 the most debtor friendly chapter in the Bankruptcy Code.

Bankruptcy is not always the best way to get rid of federal tax debt.  Given enough time, the tax may just go away.  The IRS is given 10 years from the date the tax is assessed to collect in most cases by 26 USC §6502, a section of the Internal Revenue Code. The date after which the tax can no longer be collected is called the “Collection Statute Expiration Date” or “CSED” for short in IRS lingo.

However, there are many things that can give the IRS more time to collect the tax. Under most circumstances, when the IRS collection officers are prevented from taking action to collect an overdue tax, the collection time is extended by the amount of time they can’t collect plus some extra time to restart their collection work.

Federal law prevents the IRS from using its powers to forcibly collect unpaid tax when an Offer in Compromise is pending and for an additional 30 days after the offer has been rejected if it was unsuccessful. Likewise, if a taxpayer has appealed a decision by the IRS to collect the tax by levy or siezure, the time that is taken to review the appeal, plus 30 days is added to the collection period and the CSED is extended. Both of these extension rules are contained in 26 USC §6331.

Additional provisions for extending the collection period are contained in 26 USC §6503. This section of the Internal Revenue Code provides for extension when the assets of a taxpayer are in the custody or under the control of any court, and for 6 months after they are released. The collection period also is extended for the period of time when a taxpayer is outside of the United States continuously for six months or more.

One common way the IRS collection period is extended and the CSED is delayed is by the filing of a bankruptcy court proceeding. Because federal law prohibits collection of a pre-bankruptcy tax while the case is being processed, 26 USC §6503(h) allows the IRS tax collectors additional time equal to the amount of time the case was open plus an additional 6 months for collection after the case is closed or the stay is released.

Unless it has a secured claim, the IRS is no longer able to collect tax after bankruptcy if the tax was discharged. To learn more about what types of tax debts are discharged in a bankruptcy, read: What About The IRS? and Use Bankruptcy To Solve Tax Problems. Both of these articles and many more can be found on the Bankruptcy Law Network.

Credit card debt is frequently discharged in bankruptcy.  Taxes can be paid with a credit card.  State and Federal governments accept and even encourage such payment.  However, a credit card debt incurred to pay tax is probably not dischargeable.  There are at least two important reasons why credit card convenience may result in non-dischargeable debt.

In the first place, it could be and often is considered fraud to incur a credit card debt with the intent to bankrupt the debt.  Many courts have ruled that 11 USC §523(a)(2), an exception to the discharge for money obtained by false pretenses or fraud, applies to credit card purchases made without the intent to repay them.  Important information can be found in an article by my colleague, Atlanta Bankruptcy Attorney Jonathan Ginsberg, called Recent Credit Card Use and Filing for Bankruptcy – What are some Guidelines?

Even with the intent to repay a credit card debt when the charge was made, the debt may be exempt from discharge when it was incurred to pay a tax.  Two new laws were added by Congress in 2005 to protect credit card companies in just this situation.  When used to pay a tax that is otherwise non-dischargeable, 11 USC §523(a)(14) and 11 USC 523(a)(14A) protect the creditor from discharge of the debt in bankruptcy.

Under the new laws, use of a credit card to pay tax may make a tax that is dischargeable with the passage of time, into a debt that never becomes dischargeable.  While the bankruptcy code allows discharge of personal income tax after a waiting period, there is no such provision in the new law. This is yet another reason that payment of tax with a credit card may be a bad idea.  Personal income tax that is due for recent years is considered a priority and is not dischargeable under the bankruptcy code.  While the tax would become dischargeable in two or three years if not paid, the credit card debt used to pay it would not.

According  to the 4th Circuit Court of Appeals, if you fail to tell your state taxing authorities after the IRS adjusts your taxable income, it may prevent you from discharging your state taxes in bankruptcy.

Most states with personal income taxes base their determination of taxable income on federal taxable income, subject to some additions and subtractions. As a result, they also mostly defer to the IRS on auditing individual taxpayers. When the IRS conducts an audit and makes changes to a taxpayer’s taxable income as a result, it will assess the resulting taxes and will also notify the state taxing authorities.

Despite being notified by the IRS, most states also require a taxpayer subject to a federal audit adjustment to either file an amended return or otherwise notify the state taxing authorities of the audit adjustment. The state will then make the necessary adjustments, if any, in the amount of tax owed. There is often a very short deadline after the federal audit adjustment to notify the state.

In bankruptcy, an income tax is dischargeable (absent certain tolling events, and assuming no fraud or evasion) if (a) the due date of the tax return, including any extensions, was at least 3 years before filing; (b) the return was timely filed or, if late, was filed at least 2 years pre-petition; and (c) the tax was assessed at least 240 days pre-petition. All three must be met. If the IRS assesses additional taxes after an audit, a taxpayer may only need to wait 240 days (about 8 months) after the assessment to discharge those taxes in bankruptcy, provided the 3-year and 2-year rules have by then also been met.

If the debtor timely notifies the state (in the proper manner), then it will also assess, and 8 months from that assessment (again, assuming the 2-year and 3-year rules are met as to the original return) the state taxes will also be dischargeable in bankruptcy. But if the notification or amended state return is late, or not made at all, then watch out!

Once a state filing is late, it will likely trigger its own 2-year waiting period, because, as the 4th Circuit held, even a requirement to simply report to the state (without a requirement for an actual return) is the “equivalent” of a return, triggering the 2-year rule if it is not timely filed. Even worse, if the report or amended return is late and the state assesses the taxes based on the IRS notice, then it has an argument that even if the taxpayer files the return or report later, it is simply too late to be considered a return, meaning the taxes will never be dischargeable.

While there are good arguments that the 4th Circuit got it wrong, and that a required report is not the equivalent of a return where, as is the case in many states, there is no return form, it is not required to be under penalty of perjury or even signed, and may not contain enough information for state taxes to be assessed, it is far better to avoid the issue completely and simply file a timely return or report with the state.

Short Sales, home loan write-downs and foreclosure can all result in cancellation or forgiveness of debt for the borrower.  Debt cancellation can result in taxable income to the borrower. There are many debt cancellation tax articles published on Bankruptcy Law Network.  However, there are several ways to exclude debt cancellation from  taxable income. Congress has made special provision for homeowners who get caught in this trap.  I have written about them previously but this is an important enough matter that it bears repeating.

If your home loan debt is partly or entirely cancelled or forgiven in tax years 2007 through 2012, you may be able to claim special tax relief and exclude the debt forgiven from your income. Here are 10 facts that the IRS wants you to know about Mortgage Debt Forgiveness.

1. Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence.
2. The limit is $1 million for a married person filing a separate return.
3. You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.
4. To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.
5. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.
6. Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion.
7. If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.
8. Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax relief provision. In some cases, however, other tax relief provisions – such as insolvency – may be applicable. IRS Form 982 provides more details about these provisions.
9. If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.
10. Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.

With the start of a new year, and the deadline for filing tax returns just around the corner, W-2s and 1099s are beginning to show up in the mailbox. This year, a new type of 1099 may show up unexpectedly. If any debts were cancelled last year, banks and other financial institutions are required to report the cancellation to the IRS and provide a 1099c to the taxpayer.

If a credit card debt was settled for less than full payment, the IRS considers the difference between the balance due and the amount paid to be income unless excluded under one of the statutory exemptions. If a 1099c is issued to you and your return does not include the debt cancellation information, you will receive a notice, from the IRS, that you omitted income on your return. The IRS will propose an increase in your tax liability and, absent explanation of an exclusion form income, will send a Statutory Notice of Deficiency (SNOD) that will begin the process of assessing additional tax as well as penalties and interest.

If you are working with a professional tax preparer, and you provide them with the 1099c, they will include the debt cancellation with your income for the year unless one of the following five exceptions applies:

1. The debt cancellation occurred as the result of a bankruptcy;
2. The debt cancellation occurred when you were insolvent;
3. The indebtedness cancelled was qualified farm indebtedness;
4. In the case of a taxpayer other than a C corporation, the indebtedness cancelled was qualified real property business indebtedness; or
5. The indebtedness cancelled was qualified principal residence indebtedness which is discharged before January 1, 2012.

The debt cancellation must be reported on a form 982 and submitted with the tax return when it is filed to avoid a notice from the IRS. If you are preparing your returns without professional assistance, the IRS has detailed instructions for completing form 982 on their website.

The simple answer is yes.�� Filing bankruptcy will stop the sale of the property – if filed before the time of the sale and the�taxing entity�is notified of the bankruptcy filing.

If a person is substantially behind on his or her property taxes, he may want to file a Chapter 13 which gives the him up to five years to pay back the delinquent taxes; however, the person must be eligible to file Chapter 13.� � If the amount�can be paid pretty quickly – usually within 30 days, the person may be able to file a Chapter 7, provided the person qualifies to file a 7.

�In Texas, ad valorem taxes (real estate property taxes)�are given an automatic priority and are given�the the highest priority lien status allowed.� The taxes automatically become�liens on January 1st of each year.�

Here is a list of the top 10 types of documents you should keep for tax purposes.

Proof of income can  be established by a W-2 form or a 1099.

Bank account statements and credit card statements show a history of account transactions.

Invoices and payment receipts and canceled checks show how much is owed and who was paid.

Housing closing statements and insurance documents and prior tax returns round out the list.

This list is based on recommendations from the Internal Revenue Service that was published on Bankrate.com.

The IRS program for voluntary disclosure of secret foreign bank accounts has been extended to October 15, 2009.  Several months ago the IRS announced a program to allow voluntary disclosure of foreign bank accounts by US Citizens who had failed to previously disclose them.  This program is important to some taxpayers since the failure to file what is often call the FBAR (Foreign Bank Account Report) or IRS Form TDF 90-22.1 can result in extremely high financial penalties and even criminal sanctions.

Through years of political and legal pressure, the IRS has finally managed to break down the wall of secrecy at a major Swiss bank, Zurich and Basel headquartered UBS AG.  This bank, that claims roots back into the 19^th Century, formerly called Union Bank of Switzerland, has agreed to provide what the IRS calls an “Unprecedented Amount of Information” about accounts held by US Citizens.  The famous Swiss bank secrecy is no longer any protection, at least with respect to UBS, for holders of undisclosed foreign bank accounts and the untaxed income they may provide. The US government will submit a treaty request to the Swiss government describing the accounts for which it is requesting information.  The Swiss government will then enact legislation requiring the bank to reveal information about the accounts and their owners.

The voluntary disclosure program first requires the taxpayer to report any undisclosed accounts to the criminal investigation division of the IRS.  They will be pre-cleared for waiver of criminal penalties if there is no ongoing criminal investigation.  The disclosing taxpayer must then agree to pay a reduced fine equal to 20% of the highest bank balance over the past six years, file amended tax returns to report foreign income, and make arrangements to pay the tax.  Disclosure was originally required by September 23, 2009, and has now been given a “one time” extension to October 15, 2009.  The IRS explains the program in a detailed publication of frequently asked questions.

Don’t put off filing your income tax returns because you can’t afford the fees of the tax preparers.� If you access to a computer and the Internet, and you make less then $56,000 annually, you can file your federal tax return online for free using the Internal Revenue Service program called Free File.

The software asks you question by question for the required information and does the math for you.� If you are entitled to a tax refund, it will be sent to you in as little as 10 days by direct deposit to a bank account.

Don’t let nonfiling of tax returns compound your financial problems!