Tax Returns:

A common question I get around tax season is, "Should I file my tax return?"

I have yet to find a reason NOT to file a return for any year in which a tax return is required. Often times clients do not wish to file the return because the may owe some money to the IRS or the state taxing authority. I understand the dilemma, however, it is always best to file the return even if you do owe something.

This will allow the tax to be assessed, and a liability established. Once this is accomplished and the notification of due tax comes from the taxing authority, it is easy to work out a payment plan of some sort. As a bankruptcy attorney, I want to know the amounts of all liabilities, that way I can assess the total financial picture, and make the appropriate recommendations.

If past years tax returns have not been filed, the same rule applies. All past due tax returns that were required to be filed, should be. This not only gives a clear picture of the liability, but it also stops the penalties that accrue for not filing the return.

If you have old tax debt where the return was filed and the appropriate time frame has transpired, there may be an opportunity to have those taxes discharged in a Chapter 7 bankruptcy. If the tax return has been filed and not enough time has transpired, then a reasonable repayment plan to address those delinquent taxes can be drafted by my office.

When a Chapter 13 repayment plan is developed to address delinquent taxes from any taxing authority, the penalties and interest STOP accruing once the case is filed. This can save a lot of money that would not otherwise be saved outside of a Chapter 13 repayment plan.

Tax Refunds:

Two issued generally surface this time of year when clients are expecting tax refunds. The first being that the tax refund has been intercepted, and the other, the tax refund has been spent before received.

When there exists an outstanding debt that is owed to a Federal Agency, the IRS can send the refund to that agency to offset the debt. There is no notice requirement in this offset situation, such as outstanding student loan, benefit overpayment, or other Federal Debt. Suffice it to say that once the offset occurs, it is very difficult to get it back.

My advice is to identify the outstanding debt and take appropriate action this year, so the tax refund does not get intercepted again.

From a tactical standpoint, if there is no refund due, then there would not be any intercept that would occur. I often suggest to client to seek the advice of a tax professional to ascertain what steps need to be taken to claim the correct amount of exemptions to avoid a substantial refund.

The more common problem is that a refund is spent before it is received. My advice is never purchase something on credit with the intent of paying it off when the tax refund arrives. Wait for the actual refund first, and then make the purchase. This eliminates the accrual of any interests and does not cause any further debt issues in the event that the tax refund is delayed or never arrives.

Lastly, a tax refund should not be spent at all, it should be saved. Think about a refund this way, a portion of your earnings are being set aside into a savings account each month at no interest. At the end of 12 months, all that money is sent to you in a lump sum. Place it into an interest bearing savings account and do not touch it. Save it for a rainy day.