I see a fair number of individuals who have substantial tax problems.  Bankruptcy offers relief to many, usually at a cost. The client I saw last night has $110,000 in income taxes that have hung over her for 7 years and may continue for longer because she apparently didn’t file a return for those years. Stress was eating her up.

It’s also election season, where all sides are talking about the proper allocation of the cost of running this country between business and individuals.

So there was a personal  poigancy to the GAO report last week that 2/3’s of US corporations paid no federal income tax, and even more foreign corporations doing business here paid no income tax.  What’s the deal?

To hear some politicians talk, you would think businesses actually paid the income taxes set out in the law;  it seems however that tax incentives, favors, and loopholes protect the vast majority of corporate business from any income tax at all.  Meanwhile, wage earning individuals pay taxes, or pay the price.

Kinda makes you wonder, doesn’t it.

I regularly see clients who have not filed returns because they have some issue with the IRS, either taxes that will be owed with the unfiled return, or taxes owed from earlier periods. They think they are avoiding trouble by not filing. Not so.

The IRS levies two separate penalties for non filers: a penalty for not filing the return and a separate penalty for not paying the tax.

Perhaps you can’t pay all you owe with the return, but why incur an avoidable penalty for not filing a timely return?

Tax penalties are not dischargeable in Chapter 7 until they are more than three years old. Contain the damage: file on time.

The threat of a lawsuit being filed is often what causes the first call to my office. Some collector has said he will take 25% of your wages, or will serve a lawsuit, or even will send the account to collection, and the hearer panics. Can I file bankruptcy today? the caller asks.

Remember high school civics, and the Bill of Rights’ promise of due process? Due process, at its simplest form, means that you get legal notice and a right to contest the claim of any creditor before they take your property. So, the only way the average unsecured creditor can take your wages or your assets is to file a lawsuit, serve it on you (notice) and provide an opportunity for you to resist the suit. In short, you will see this kind of creditor coming after you long before they have a legal right to take anything from you.

The unsecured creditors who can take your money without suing you are your bank and the taxing authorities. Your bank has a right of offset under state law: it owes you the return of your money on deposit and you owe it on a credit card or other loan. The bank may take the money in your account to satisfy your debt to it.

The IRS also has a right to levy on your account for unpaid taxes. The Internal Revenue Code has requirements about giving you notice of your tax debt, but the IRS does not have to file a lawsuit to collect its money.

So, in my book, the bank and the IRS are the creditors that have real powers to snatch your money on short or no notice. The collector for a credit card company wants you to think they have immediate and horrific tools to collect their bill, but it isn’t so. It’s just so much easier for them to collect if they gloss over your right to due process.

Two tax issues popped up as I discussed impending foreclosures with a client with several investment properties. Remember that a foreclosure sale is treated for tax purposes as though it was an actual sale, with the winning bid treated as though the property owner got the money. The result is that a capital gain may result. This is more likely if the property has been held for a substantial period and the tax basis reduced by depreciation or the property has been refinanced and the equity pulled out.

The second possible tax gotcha may arise in short sale situations where the amount of the shortage may result in cancellation of debt income.

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