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Small Business Owner Bankruptcy Cases

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In small business owner cases, the debtor may not be required to file a separate disclosure statement, provided that the “court determines that adequate information is contained in the [reorganization] plan” (“Bankruptcy Basics, p. 30). With this in mind, small business bankruptcy cases are treated differently than regular bankruptcy cases.

Key Takeaways

  • In small business owner cases, the debtor may not be required to file a separate disclosure statement, provided that the “court determines that adequate information is contained in the [reorganization] plan” (“Bankruptcy Basics, p. 30).
  • For example, to determine the classification of small business debtor, the debtor must pass a two-part test.
  • The small business debtor is required to submit with the petition a recently prepared balance sheet, a statement of operations, a cash flow statement, and the most recently filed tax return.

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Chapter 11 Bankruptcy

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Chapter 11 bankruptcy is a form of reorganization under the U.S. Bankruptcy Code. The requirements specific to an individual debtor work much the same as those outlined under chapter 7. However, with chapter 11 bankruptcy, a petition may be voluntary or involuntary. When the petition is involuntary, it is filed by creditors that meet certain requirements (“Bankruptcy Basics, p. 29”). Voluntary petitions require adherence to a prescribed format; debtors must use “Form 1 of the Official Forms prescribed by the Judicial Conference of the United States” (p. 29).

Key Takeaways

  • The types of documents that debtors must file are similar to those required under chapter 7, but they are also specific to businesses.
  • Voluntary petitions reference standard information, which includes the debtor’s name, social security number and identification, residence, location of principal assets, debtor’s plan to file, and request for relief.
  • Chapter 11 bankruptcy relief allows the debtor, in general, to create a liquidating plan. This type of plan allows the debtor to liquidate the business “under more economically advantageous circumstances than a chapter 7 liquidation” (p. 39).

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Chapter 7 Bankruptcy

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Chapter 7 bankruptcy is a form of liquidation under the U.S. Bankruptcy Code. Under Chapter 7, the trustee of the bankruptcy court “gathers and sells the debtor’s nonexempt assets and uses the proceeds of such assets to pay holders of claims (creditors) in accordance with the provisions of the Bankruptcy Code” (USCourts.gov, “Bankruptcy Basics PDF, p. 14), 8/15/2013). Within this context, the debtor’s property can be subject to lien and mortgages, pledging the property to other creditors. The Bankruptcy Code allows the debtor to keep certain property that falls under “exempt.” Other non-exempt remaining assets will be liquidated. In essence, filing under Chapter 7 may result in the loss of property.

Key Takeaways

  • Qualifying for relief requires a debtor to fall under one or more categories, which may include individual, partnership, corporation, or other business entity. There are limitations with regard to eligibility.
  • Filing for chapter 7 bankruptcy relief “automatically stays” most collection actions. “The stay arises by operation of law and requires no judicial action.

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The Collection Statute Expiration Date

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The Collection Statute Expiration Date (CSED) falls under Section 19[1] of the Internal Revenue Manual (IRM). The CSED refers to the idea that every tax assessment has a statute of limitations. The rules and procedures for the CSED are governed by statute, namely section 6502(a) of the Restructuring and Reform Act of 1998 (RRA 98).

Key Takeaways

  • According to the IRM, each tax assessment has a collection statute expiration date, or CSED (IRS.gov, “Part 5. Collecting Process, Chapter 1. Field Collecting Procedures, Section 19. Collection Statute Expiration,” 8/17/2013).
  • If you file for bankruptcy, because of the automatic stay imposed by the proceedings, the CSED is generally suspended.
  • The CSED is extended throughout the duration of the bankruptcy proceedings plus six months. It is extended on non-dischargeable tax liabilities, from the date of filing for bankruptcy to the date the bankruptcy is either discharged or dismissed.

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Psychological Effect of IRS Collections

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Achieving financial stability should be a lifelong goal. Developing financial plans and meeting long-term objectives is a lengthy process that requires patience, discipline, and endurance. What happens when your plans are disturbed because of past and present financial issues that threaten to destroy your future? Bankruptcy is one of those financial problems that take into consideration your past, your present, and your future.

Key Takeaways

  • Achieving financial stability should be a lifelong goal. Developing financial plans and meeting long-term objectives is a lengthy process that requires patience, discipline, and endurance.
  • What you have done with money up to this point will dictate, in essence, how money will be distributed from the income you bring in. Now you must develop a debt repayment plan and lose a significant percentage of your income to repaying old debts.
  • A money crisis is taxing on the mental state. This is especially significant for filers of bankruptcy.

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IRS Wage Garnishment Protocol

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Wage garnishment is the most common type of garnishment, or attachment to earnings and/or assets. Wage garnishment is defined as the process of deducting money from an employee’s wages, or monetary compensation, as a result of a court order or related equitable procedure. A wage garnishment will continue until the entire debt is paid. There are common examples of different types of debts that result in wage garnishment. These types include child support, defaulted student loans, taxes, and unpaid court fines.

Key Takeaways

  • When employers receive a notice to withhold part of an employee’s wages, the garnishment becomes a part of the payroll process. Employers are required to make the deductions until the debt is satisfied.
  • The deductions above are required by law. The deductions that are not required by law include union dues, health and life insurance, and charitable contributions (“Wage and Hours Worked: Wage Garnishment”).
  • However, Title III allows for the garnishment of wages at a greater amount when it comes to child support, bankruptcy, and/or federal or state tax payments (“Wages and Hours Worked”).

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IRS Penalty Abatements and Reasonable Cause

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IRS Penalty Abatements

As noted previously, the purpose of (assessing) a penalty is to encourage voluntary compliance. “Voluntary compliance exists when taxpayers conform to the law without compulsion or threat” (IRS.gov, “20.1.1.2.1 Encouraging Voluntary Compliance,” 8/14/2013). The taxpayer supports the tenets of the Internal Revenue Code in achieving voluntary compliance when he or she makes a good faith effort to meet all tax obligations (“Encouraging Voluntary Compliance”).

Key Takeaways

  • As noted previously, the purpose of (assessing) a penalty is to encourage voluntary compliance. “Voluntary compliance exists when taxpayers conform to the law without compulsion or threat” (IRS.gov, “20.1.1.2.1 Encouraging Voluntary Compliance,” 8/14/2013).
  • Within this context, the taxpayer is deemed compliant when he or she responds to written materials outlining the tax rules and completes all forms relevant to their tax liability.
  • When a taxpayer provides an explanation to support his or her request for relief, the IRS waives and/or abates the applicable penalty.

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How IRS Interest is Calculated

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You are required to file a return if you have earned income in the previous year. You are also required to pay all tax by the due date to avoid IRS interest and penalty charges. The official due date to file and pay taxes is April 15. This is the “deadline for most people to file their individual income tax return and pay any tax owed” (IRS.gov, “Topic 653 – IRS Notices and Bills, Penalties and Interest Charges,” 7/26/2013). All U.S. tax returns are checked for mathematical accuracy. In the event that you owe money to the IRS, you will be sent a bill. With this in mind, familiarize yourself with the different types of penalties and IRS interest charged to your tax balance as well as the procedures and methods used to calculate interest and penalties.

Key Takeaways

  • You are required to file a return if you have earned income in the previous year. You are also required to pay all tax by the due date to avoid IRS interest and penalty charges. The official due date to file and pay taxes is April 15.
  • For example, there is an IRS interest charge on the unpaid tax. Unpaid tax is determined by the balance due from the date of the return to the date of payment (“Topic 653”).
  • It is important to note that the one-half of one percent rate will increase to one percent when the tax is unpaid for 10 days; and this is the time maximum for after the IRS issues a notice of intent to levy.

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More on IRS Interest Abatements

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According to section 20.27.1 Interest Abatement and Suspension Overview, reasonable cause can never serve as the basis for an IRS interest abatement (IRS.gov, 8/14/2013). With this in mind, the interest on a tax liability will accrue from the return due date until the taxpayer pays the tax obligation in full. Exceptions to the law may allow the authorization of an abatement, or suspension of interest. Exceptions may also consider certain periods relative to computing interest. When exceptions are overlooked, taxpayers may exercise the option for filing Form 843, Claim for Refund and Request for Abatement, or submitting written, signed correspondence requesting consideration.

Key Takeaways

  • According to section 20.27.1 Interest Abatement and Suspension Overview, reasonable cause can never serve as the basis for an IRS interest abatement (IRS.gov, 8/14/2013).
  • With this in mind, to request an abatement of interest charges, the taxpayer must “file an interest abatement claim with the campus where they last filed a tax return” (“Interest Abatement and Suspension Overview”).
  • The IRS may suspend interest if it is determined that it failed to provide the taxpayer with adequate notice of liability as well as failed to provide information concerning the basis for the liability (IRS.gov, “0.2.7.

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First Time Penalty Abatement Program

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Key Takeaways

  • The First Time Penalty Abatement Program relief is a one-time consideration that is applied to a first-time penalty charge.
  • [1] IRS.gov, “Part 20.
  • [5] Subsequent requests for penalty relief are typically received after the initial request for relief has been denied and are viewed as appeals to the previous relief denial (“Part 20”).

The First Time Penalty Abatement Program relief is a one-time consideration that is applied to a first-time penalty charge. The penalty relief is based upon the taxpayer’s compliance history.

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Brotman Law Featured in Inc. Magazine - Fastest Growing Law Firm in California