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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28856
Experience:  Taxes, Immigration, Labor Relations
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If I file chapter 13 year 2011-2012 will that wipe away my

Customer Question

Customer: Hello...if I file chapter 13 for tax year 2011-2012 will that wipe away my tax liability for those two years? Both Federal and now CA State is claiming I owe money for those years!
JA: Thanks. Can you give me any more details about your issue?
Customer: I was audited in 2014 for Tax year by the Feds and I owe according to them approximately 30K. They through out 100% of my deductions and since then my income has been reduced significantly. In fact I have been unemployed on and off since 2012 but have had some income as an independent contractor. Now the CA state Franchise Tax is trying to collect approximately 13K for those years. I currently plan on sending a 7275 protest letter (form) which is due by next week. I hired an attorney who is negotiating with the IRS on a offer of compromise but have receive little direction on the notice from the State.
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Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

If you file for the bankruptcy protection - that woudl not automatically provide a relief from all tax debts.

You must specifically include these debts into your bankruptcy case.

If the income tax debt meets all five of these rules, then the tax debt is discharged in bankruptcy petitions.

-The due date for filing a tax return is at least three years ago.

-The tax return was filed at least two years ago.-The tax assessment is at least 240 days old.

-The tax return was not fraudulent.

-The taxpayer is not guilty of tax evasion.


Another issue - when the debt was discharges - any type of debt - it creates so-called COD (cancellation of debt) income - and that income is included into gross taxable income in the year it was discharges.

You should receive form 1099C reporting that amount.

In this case - you may file form 982 to exclude that amount from taxable income.

Customer: replied 1 year ago.
The state CA has just sent a letter stating I owe the 13K and I can either agree or protest using form 7275. Since the request has just taken place then that I assume hasn't started the clock on the 240 days?
Please clarify...thanks!
Expert:  Lev replied 1 year ago.

Before making such decision - we need to know what exactly income was missed
if they "think" that you owe the 13K - we need to know how that amount was calculated.

can you specify - what year was audited? what exactly income was missed?

Customer: replied 1 year ago.
The state used the formula and information that the Feds used. I had regular income and a small consulting business in 2011-2012. For those years the IRS auditor in 2014 disallowed 100% of those deductions. At the time I didn't have the money to hire a tax attorney to fight their findings. I did hire in June 2015 a tax attorney to file a offer in compromise with the Feds. They are still reviewing that offer. In mid December the State sent this notice basically mirroring the Fed's assessment. So I can respond to the state with a protest (due by next week) or go along with their request for additional taxes owed. At this point the IRS nor the State has not filed any liens against my home.....I'm hopeful that by filing Ch. 13 now before any liens are filed will help protect that asset. However I believe the longer I wait the greater the chance of either the state or Feds filing a lien. What do you think!
Customer: replied 1 year ago.
Tax Year 2011-2012
Customer: replied 1 year ago.
Disallowed 100% of my small business tax deductions. If I could have done this all over, I would have hired a tax attorney or professional to negotiate....there was NO WAY that all of my tax deductions should have been disallowed! So at this point I'm more concerned with protecting what little equity I have in my home and protecting it from any tax liens!
Customer: replied 1 year ago.
I'm assuming that the document I uploaded will not be published for others to see?
Expert:  Lev replied 1 year ago.

Indeed all information posted is available for general public.

If you have a concern - you need to contact the customer service asking to remove it.
I will review the document and will reply shortly.

Expert:  Lev replied 1 year ago.

So far these tax assessments - federal and state - were assessed AFTER you file for the bankruptcy protection - and therefore these debts were NOT covered and not eliminated.

The issue is that you agreed with federal assessment - specifically if you applied for the offer in compromise with the IRS - you must agree with assessments.

That was a critical point- regardless of your reasons why you choose that course of actions - you agreed and did not appeal the federal assessment.

That automatically resulted increase of your taxable income for both - federal and state tax purposes - and as we see triggered state tax assessment on the same income

At this point - state tax assessment is based on federal tax assessment - and same rules are used to calculate taxable income - thus while these deductions might be valid - you may not claim them for state tax purposes only and not to claim on your federal tax return.

At this point - if you succeed with OIC you filed to the IRS - you will need to take a similar procedure with state taxing authorities.

If that is not possible - you woudl need to set an installment payment plan.

Unfortunately - there is no easy and simple resolution.