Articles Posted in Tax

Undoubtedly, as tax day approaches, there are people right now who are struggling with the question: “I haven’t filed in [fill in the blank]____ years. Should I file this year?” As a tax and bankruptcy lawyer serving individuals and businesses in Maryland and DC, this law firm is very familiar with this taxpayer’s quandary.

On the whole, it’s better to file — even if you can’t pay — for a number of reasons:

• IRS, and the state tax authority, make a distinction when it comes to charging you with civil tax infractions. There are a separate set of penalties added to your tax bill for “failure to file” and “failure to pay.” Go ahead and file, at least. You’ll save yourself some money in penalties.

It feels like another kick in the teeth: You lose a home or rental property in a foreclosure or short sale, get a Form 1099-C from the mortgage company, and now you have to pay income taxes on it, too? Like a lot of things in the law, it depends.

It’s a curious, but absolutely-settled principle of tax law, that a debt that is forgiven by a lender becomes taxable income to the borrower. Basically the accounting works like this: When you took out the loan it’s not considered income because you have an obligation to pay it back. When, however, that obligation is removed, you become richer by the amount of debt that you will not have to pay, and the tax law says that must be recognized and you must pay income taxes on it.

Unfair, you may say, but it’s the law. In late 2007, federal lawmakers decided to give SOME relief to taxpayers losing personal residences and changed the law so that the resulting income could be excluded from income tax, if the forgiveness (also known as “cancellation in indebtedness” and

The Internal Revenue Service reported this week that IRS audits are up 11% for this year. Frankly, it’s not real surprising.

It’s during hard times that taxpayers feel the pinch and are more likely to cut corners and try to pay a little less into the public fisc. Likewise, as tax revenue goes down, the government will look for more income by increasing audits, publicizing that fact, and thereby scare more taxpayers into compliance.

This tax law firm expects to have more than the usual number of cases in the near future as more unlucky taxpayers get caught in the taxman’s web.

Except for the occasional expletive, this poor man’s tale of woe sounds just like the ones I hear all the time from unlucky tax debtors who’d been burned by the mill at J.K. Harris. Below is his text.

“If you’re thinking about using J.K. Harris, my personal opinion (based on experience with them) is run like hell. Go find a local attorney that specializes in tax and can’t hide behind call centers. They took $7500 and would not refund my money even though they had performed very poorly, dragging my case out over a year and ultimately I had to hire another attorney to keep the IRS from exercising their wrath on me. The JK Harris CPA contact that told me he’d be right there with me the whole way did NOT return phone calls. Their boiler room customer service was a nightmare to deal with. Don’t believe me? Look up all the State DA lawsuits against them. Their valuation of my business was a joke and cost me a couple of thousand.”

1237319_sign_of_suppression__1.jpgHardship withdrawals from retirement plans, such as 401K plans, nationwide have reached a ten-year high, according to a report issued last week by Fidelity Investments which administers about 17,000 plans across the country covering some 11 million participants.

In the second quarter of this year, about 62,000 workers asked for withdrawals from retirement plans to pay medical expenses, costs to purchase or repair a primary home, tuition and education expenses, burial or funeral expenses, or to prevent an eviction or foreclosure on a primary home.

Even worse, besides withdrawals, more and more people are taking loans from retirement plans. A two percent increase in the second quarter now means that 22 percent – almost a quarter of all participants — have outstanding loans against their accounts.

It’s a risky and sometimes financially-disastrous game for consumers. Too often, in my fifteen years of bankruptcy practice in the Washington-DC area, I have seen people needlessly lose their retirement, and worse, dig themselves into a deeper hole.

There are several typical scenarios:

  • To stop collectors from hounding him, the debtor takes a lump sum withdrawal to pay off his bills. Unfortunately, many do not subtract withholding taxes from the withdrawal. When the end of the year comes, the debtor does not have the cash to pay the income tax plus the additional 10-percent penalty. The debtor has now turned his debt problem into a more serious tax problem.
  • The debtor takes a loan to pay off debts or make payments on debts, and then as his income situation deteriorates, he defaults on the 401K loan payments. At the end of the year, a “distribution” (equivalent to a withdrawal) is declared. The full tax and 10-percent penalty on the loan is now due.
  • To stop a foreclosure or mollify creditors, the debtor takes out a loan or withdrawal to make the minimum payments on installment loans or pay the mortgage. The saddest cases are person who drain retirement funds, which are generally protected in bankruptcy, to make minimum payments on debts that never go away, or the house goes into foreclosure anyway when the money runs out. In most cases the debt could have been discharged in bankruptcy from the very beginning and he still would have kept the tens and hundreds of thousand he had saved for retirement. The debtor “ate his seed corn” for nothing!

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1225798_the_capitol_2.jpgAs the economy falters, local governments also are feeling the pinch since tax revenues decline. Virginia and Maryland had two-month tax amnesty windows last year. Now it’s the District of Columbia’s turn.

Running August 2 to September 30, 2010, under the temporary tax amnesty taxpayers who owe taxes to DC will be able to pay without penalties. No questions asked.

The savings can be substantial, especially if no return was ever filed, since there are “failure to file” penalties, as well as “failure to pay” penalties. With interest and penalties, the effective growth rate of a tax debt can be approximately 25 percent a year!

DC’s new tax amnesty initiative indicates there will be no criminal tax prosecution. But, if under the facts of your situation, there is any possibility the government could make a case for PURPOSEFUL tax evasion, you may want to consult counsel before coming forward. Interest will not be waived, and usually cannot be under the law.

The types of taxes qualifying for the amnesty are:

  • Income
  • Gross receipts (a business tax)
  • Estate
  • Tobacco
  • Toll communications

Real property tax does not qualify.

The website has a handy interest calculator to add up your the total you owe once you’ve figured your tax.

Note that the information will be shared with the federal government, so expect a bill from IRS that you will have to deal with.
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