Don't be afraid to file. You will owe less and may have debt forgiven
No one should ever advocate filing tax returns that are late or not accurate and complete. As professionals, we can never provide advice to clients as to how to evade income tax, but we can help you go through the tax maze that causes you to stay up nights worrying about losing your wages or assets and having liens filed against you that you may never pay back. Knowing what to do, when to do it, and how to do it is the cornerstone of a professional’s advice. Knowing the differences in each case and knowing how to maximize, legally, the benefit is what a client retains their lawyer and tax advisor to do.
For example, if you live in Massachusetts, not only must you be concerned with filing a federal tax return, but you must be ready to file a state return. Penalties for not timely filing your federal tax return may result in liens, levies, and loss of significant assets - your home, wages and your ability to support yourself. To compound matters, there is a unique statute in Massachusetts that allows the Department of Revenue to suspend driver’s licenses and one that may cause you not to renew certain professional licenses when there are state taxes overdue for a significant amount of time. Here is part of the solution:
FILE ON TIME EVEN IF YOU DON’T HAVE THE MONEY TO PAY.
To avoid costly penalties, try to file your tax returns on time. Filing on time avoids your paying, at least, the late filing penalty of five (5%) percent each month up to twenty-five (25%) percent for the federal and one (1%) percent (or a fraction thereof) up to twenty-five (25%) percent of the Massachusetts tax.
If you owe tax to both taxing authorities, a rule of thumb is to pay the tax with the highest interest rate first while you try to resolve the other liability. Typically, this is the state. Request a re-payment plan or file an Offer in Compromise: in desperate times, submit a hardship request. A payment plan will not stop penalties and interest, but it will stop collection levies (not liens) while you pay the tax due. A hardship request will stop collection levies, but penalties and interest will continue to accrue. The Massachusetts tax penalties and interest are significant and difficult to repay if you are on limited income; and therefore, an Offer in Compromise, depending upon your circumstances, may be warranted. An Offer in Compromise is an offer to pay a reduced sum, sometimes over a period of time, depending upon your personal circumstances, which, if accepted, relieves you of the entire debt. These are time consuming processes, but can help with tax debt which is threatening to upset your entire financial survival.
Similar programs are available through the Internal Revenue Service, but different rules apply. Each taxing authority has their own statute of limitations for collecting tax and unless a law suit is commenced to enter a Judgment against you, the statute of limitations typically could run ten (10) years after the assessment date. If a lien has been filed, collection activity may still take place beyond the ten (10) year statute of limitations, in rem.
When all else fails or in the event you find yourself overwhelmed with other debt, the Bankruptcy Code provides relief in the form of a discharge from personal liability regarding a debt for a tax, “with respect to which, a return, or equivalent report or notice, if required, was given.” There is a split of authority in the United States as to whether a late filed return satisfies the requirements of applicable non-bankruptcy law, (11 U.S.C. §523(a)). The First Circuit, controlling law in Massachusetts, follows the “one day late rule”, which provides that a late filed return is not a return under non-applicable bankruptcy rules and therefore, the tax associated with the return is non-dischargeable. As mentioned earlier, there is a split in jurisdictions, some following the “one day late” rule and some following the requirements as set forth in Baird v. Commissioner of Internal Revenue, 82 T.C. 766, 777(TC) 1984, aff’d, 793 F2d 139 (6th Cir. 1986). Under Baird, there are four (4) requirements for a document to be treated as a tax return and they are set forth in the Court’s decision. The cornerstone of the Baird decision is whether a late filed Form 1040 represents “an honest and reasonable effort to comply with the tax law”.
The United States Supreme Judicial Court has thus far refused to resolve the split in jurisdictions, but nevertheless, if you reside in Massachusetts and owe federal taxes based upon a late filed return, your federal taxes may not be dischargeable in bankruptcy; however the penalties may remain dischargeable and there are mechanisms for repaying the tax and interest in a controlled manner without losing your assets, e.g. Chapter 11 or Chapter 13 bankruptcy proceeding.
Of course, tax law is complicated and the methods for seeking tax relief are arduous; but in the long run, it may be worthwhile to attack this problem head on, rather than wait for it to show up at your doorstep and unexpectedly upset your financial condition. Seeking sound tax and bankruptcy law advice is essential to resolving these matters; and remember, if a tax return is filed on time, you are more likely to obtain the relief that you are seeking.
1. For unpaid tax over sixty (60) days, the minimum penalty is one hundred thirty-five ($135.00) dollars or ten (10%) percent of your unpaid tax, whichever is less.
3. A tax return is not late if it is on a properly filed extension and the extension payment covers the tax eventually due on the tax return.
The contents of this article are not to be construed as legal advice or an obligation to act for any particular person. The opinions expressed are those of the author. No attorney/client relationship is established without the expressed written consent of both parties.
CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that, unless specifically indicated otherwise, any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Service Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, Bretta Law Advisors, P.C. would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultations services.