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Many states have their own personal income tax. Generally these states also have laws that require a taxpayer to submit a copy of the IRS audit report if the federal liability is adjusted due to a reallocation of income or deductions on a previously filed return. The failure to do so may cause bankruptcy discharge problems . Changes to federal law contained in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 may render any undisclosed increase in liability a non-dischargeable debt for bankruptcy purposes.
Federal law gives the IRS a lien on all of a delinquent taxpayer assets if tax is not paid. The Federal Tax Lien is a powerful tool that the government uses to collect tax. However, it is the Notice of Federal Tax Lien that most people think of when the subject comes up. This notice is filed by the IRS when the government stakes a claim on the taxpayer’s property. The filing of a Federal Tax Lien makes the tax debt public and gives the US Treasury a priority interest above all later claims of creditors in the taxpayer’s property.
A tax lien is created automatically after the following three things occur:
- The IRS assess tax liability against the taxpayer;
- A notice of liability and demand for payment has been sent; and,
- The tax debt remains unpaid for more than 10 days after notice.
At that point in time, once these three things have happened, a “secret lien” exists on everything owned by the taxpayer.
The tax lien becomes public when the IRS files a Notice of Federal Tax Lien in the public records. It must be filed or recorded in the place state law requires for the filing of liens and must be filed in the state where the taxpayer lives. The IRS then sends a copy of the notice it has filed to the taxpayer. It is this recorded notice that makes the lien public and gives it priority over any later claims.
A Federal Tax Lien, when properly recorded or filed, gives the government a property interest in everything the taxpayer ownes. With only limited exceptions, this government interest follows the asset wherever it goes. The IRS may claim its rights in the property covered by the lien even after it has been sold to another person.
Income tax as well as some other types of tax can be discharged in bankruptcy if certain conditions are met. This applies in consumer bankruptcy cases, both Chapter 7 and Chapter 13, and covers Federal, State and local income tax liability. However, all requirements must be met before the bankruptcy is filed or the debt will remain collectible after the case is closed. To be dischargeable in bankruptcy, income tax must meet the following requirements:
- The income tax return must have last been due more than three years before the bankruptcy;
- The tax return must have been filed at least two years prior to the bankruptcy (in some circuits it must have been timely);
- The tax must have been assessed by the government;
- The tax returns must not have been fraudulent; and,
- There must not have been a willful attempt to evade or defeat the tax.
When each of these conditions are met, and no exceptions to the rules apply, the tax can be discharged in the bankruptcy proceeding.
Many of my clients come to see me about penalties assessed against them by the IRS. For example, if you don’t file your return on time or if you do not pay your tax by the due date you may be assessed a penalty. The following is a list of nine things the IRS wants you to know about the two different penalties you may face if you do not pay or file on time.
The quickest way to get your refund is to e-file your tax return and have your refund directly deposited to your checking and/or savings account.
The IRS has certain dates on which they send direct deposits and when they mail paper checks. There is a seven day delay between the two dates which means that your direct deposit will be sent to your account(s) seven days before a paper check is even put in the mail.
The sending of your direct deposit refund could take as few as six days or as many as 15 days from the date that you filed your tax return. The reason for this is that returns are batched in groups by the IRS. Each group has a specific date span. For instance all returns e-filed between February 18th and February 25th will have their direct deposit refunds sent on March 5th or a paper check mailed on March 12th. The IRS has printed a convenient chart showing all 2010 dates through 10/21/2010.
For tax years 2009 and 2010 undergraduate students may qualify for the Hope Credit (now called the American Opportunity Credit) for four years instead of two and be eligible for a refund of this credit up to 40% of the credit. Also what qualifies as education expenses for the Hope Credit has been expanded. This is great news since the Hope Credit offers the largest amount of credit – up to $2,500.00 per student.
Previous to tax year 2009, this credit was only available for the first two years of undergraduate education, was not refundable, and was limited to $1,800.00 per student. Also previous to 2009 books and supplies for school did not count as part of qualified education expenses. Now for a student’s first four years at a qualified educational institution, the credit has been expanded to include both tuition expenses as well as books and supplies.