The Benefits of Using a Tax Lawyer to File Bankruptcy in Colorado

July 30, 2012

By: David M. Serafin

As a Centennial, Parker and Highlands Ranch, Colorado bankruptcy lawyer who holds a Master’s Degree in Taxation, I am retained by many self-employed and higher income debtors in U.S. Bankruptcy Court in Colorado. Many bankruptcy lawyers want nothing to do with any tax related issues which results in a disservice being done to clients looking for the best financial benefit possible, whether in chapter 7 or chapter 13. Other lawyers will not even take time to calculate tax withholding to determine if the debtor can take additional Means Test (or Form 22A or Form 22C) deductions for under withheld FICA or income taxes.

Non-recognition of income and employment tax issues in bankruptcy can mean a chapter 7 client being pushed into chapter 13 or the latter being pushed into a higher re-payment plan or payment duration. At the least, failing to advise in advance as to proper income tax withholding before bankruptcy can lead to a chapter 7 trustee making claim to a large (non-exempt) tax refund which could have been first received and legally spent down prior to bankruptcy.

From a planning standpoint, a tax attorney can also properly advise as to the income tax or capital gains ramifications of selling a valuable asset (at a gain or loss) in anticipation of bankruptcy. Many debtors “spend down” non-exempt assets just prior to filing but such a disposal could have adverse income tax consequences. Other clients can use an ongoing net operating loss to offset tax liability and then spend down a tax refund before bankruptcy. Especially for Colorado entrepreneurs, just the thought of having a bankruptcy lawyer with a tax background who can analyze personal and business tax returns, and accompanying schedules, is comforting especially when the debtor is required to bring all tax returns to the Section 341 Meeting of Creditors.

An experienced tax attorney can identify which tax debts can be eliminated in bankruptcy versus which need to be paid back in either chapter 13 or directly to the IRS with an Installment Agreement in chapter 7. Compared to dealing with the IRS or State of Colorado directly, Bankruptcy court is more of a debtor friendly forum whereby we can best fight against higher taxes. In bankruptcy, the IRS or State will file a Proof of Claim stating the Priority (e.g. non-dischargeable) taxes owed. I have multiple cases in which I have successfully objected to the IRS or State’s Proof of Claim in Bankruptcy Court. (One interesting case I have currently involves our objection to the IRS’ assessment of an S Corporation shareholder’s 100% employment tax liability even though he was only a 17% shareholder during the payroll tax quarters in question. The IRS refused to negotiate the tax down so we anticipate litigating the issues before a Bankruptcy Court judge.) Regardless, payback of non-discharged taxes in chapter 13 s far preferable to an IRS Installment Agreement because only the former halts interest and penalties.

An IRS tax lien may require the payback of otherwise discharged personal income taxes if a tax lien was properly recorded against the debtor’s property before bankruptcy. (Taxes secured by a tax lien are required to be paid back in chapter 13 – an obvious boon to higher income earners. But, those with no real property and little personal property can “cram down” the secured tax lien down to the value of the personal property.)

Even for wages earners with more modest incomes, an experienced Colorado tax lawyer can help prevent a trustee from seizing a refundable Earned Income Credit (EIC) or Child Tax Credit.