We’re seeing more and more situations here in the Charleston area in which people have “tax messes.” Here are some things to keep in mind about tax problems.
1. File your taxes on time. Failure to file is actually a crime. You may need an extension. If you can’t file on time, file for an extension, but don’t just ignore the problem.
Keep in mind that getting an extension to file does not mean that you have been granted an extension to pay. Your taxes are due on tax day each year, April 15 or a few days after that if April 15 is a holiday or weekend.
Some appeals courts have held that if you file your taxes even one day late (yes, one day late!) then you have not filed a “return” as required under the Bankruptcy Code, and, as a result, you can never (yes, never!) discharge taxes in bankruptcy. (For a more detailed discussion of discharging taxes in bankruptcy, see Filing Bankruptcy to Discharge Income Tax Debt.) Here in South Carolina, we’re in the 4th Circuit Cout of Appeals, and that court has not yet held that filing late bars discharge of tax debt in bankruptcy. But that still doesn’t mean it’s a good idea.
And filing your taxes late causes other problems. If you file so late that the IRS files a Substitute for Return (SFR), then your taxes are never able to be discharged in bankruptcy even if you meet the other requirements according to a case here in the 4th Circuit, Moroney v. U.S., 352 F.3d 902, 907 (4th Cir. 2003).
2. Find a good tax preparer or CPA. Whether you need a tax preparer or CPA depends on your situation. There are many good tax preparers out there, and there are some horrible ones, too. Get recommendations from your family and friends who have used that preparer, particularly those who have used the preparer for several years and can attest to the competence of the preparer. CPAs undergo far more training and testing than tax preparers, but the same approach rings true for selecting a good CPA.
3. If you can’t pay your taxes, don’t ignore the problem. Ignoring problems never works. If you owe taxes, get help immediately. Seek advice from your tax preparer or CPA, or, if the problem is on the small side, reach out directly to the IRS and South Carolina Department of Revenue. If you have a really big tax problem and it’s combined with other financial problems, get help from a bankruptcy attorney. If you don’t need to file bankruptcy, the bankruptcy attorney can point you in the right direction.
3. If you get on a payment plan for your taxes, make all the payments. Many times, penalties can be abated if you make required payments. However, if you default on your repayment plan, those penalties may be added back on to your account balance.
4. For some taxpayers, bankruptcy is a good option for addressing tax debt. Sometimes, bankruptcy can completely wipe out tax debt. At other times, some of it can be wiped out, and some remains. In other cases, you can’t get out of the tax debt, but you can get out of the penalties and some of the interest and repay the tax over several years while under the protection of the automatic stay.
6. The most important thing to know above all else: File on time! Okay, if you’re paying attention, you know I said “5 Things” and this is number 6, but it’s worth mentioning twice! When I meet with a client with tax issues, that’s the first thing I try to verify. If you file on time, most tax issues can be resolved—either through bankruptcy or outside of bankruptcy. Aways file on time. Always!