Saturday, May 19, 2012

Bankruptcy and the IRS

FS-2005-18, November 2005
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) amends the U.S. Bankruptcy Code by adding new responsibilities for debtors.
In general, the new law requires that debtors comply with their tax-filing responsibilities, make available previously-filed tax returns, in many cases, and seek credit counseling services. Most BAPCPA provisions apply to cases filed on or after Oct. 17, 2005.

Tax Returns Must be Filed
Under the new law, if debtors fail to file a return that becomes due after the date of their bankruptcy petition, or fail to file an extension, the IRS may request the Court to order a conversion (change from Chapter 7 to Chapter 11 or from Chapter 11 to Chapter 13, for example) or dismissal of the case. Conversion or dismissal may also be ordered if a Chapter 11 debtor fails to timely pay tax obligations owed after the date of the bankruptcy petition.
In order to have their plan confirmed, Chapter 13 debtors must also file all tax returns with the IRS for the four-year period before the bankruptcy petition. The debtor must establish filing by the first meeting of creditors.
Seven days before the first meeting of creditors, debtors must provide trustees a copy of their most recently filed federal tax return or a transcript of the return. Similarly, copies of amendments to such returns, and any past due returns filed while the case is pending, must also be filed with the court if requested. The returns or transcripts must be provided to the court at the same time they are filed with the IRS. If the returns or transcripts are not filed, a Chapter 7 discharge will not be granted, or a Chapter 11 or 13 plan will not be confirmed. In addition, debtors must also provide a copy of the tax return or transcript to requesting creditors.
Means Testing for Chapter 13
Under the new law, individual debtors who meet certain income tests will be required to make regular payments on their debts under a Chapter 13 plan. The new law also authorizes the bankruptcy courts to modify IRS expense standards and use them to make this “means test.” 

EDeclaring Bankruptcy

Bankruptcy proceedings begin with the filing of a petition with the bankruptcy court. The filing of the petitions creates a bankruptcy estate, which generally consists of all the assets of the person filing the bankruptcy petition.  A separate taxable entity is created if the bankruptcy petition is filed by an individual under chapter 7 or chapter 11 of the Bankruptcy Code. 
The tax obligations of the person filing a bankruptcy petition (the debtor) vary depending on the bankruptcy chapter under which the petition was filed. 
Generally, when a debt owed to another is canceled the amount canceled or forgiven is considered income that is taxed to the person owing the debt.  If a debt is canceled under a bankruptcy proceeding, the amount canceled is not income.  However, the canceled debt reduces the amount of other tax benefits the debtor would otherwise be entitled to. 
This information is not intended to cover bankruptcy law in general, or to provide detailed discussions of the tax rules for the more complex corporate bankruptcy reorganizations or other highly technical transactions. For additional tax information on bankruptcy, refer to Publication 908, Bankruptcy Tax Guide.
Here are some helpful tips for bankruptcy trustees who receive IRS Collection notices:
  • If the IRS is a creditor in a bankruptcy case, and you determine that IRS was not originally listed as a creditor, notification of the filing should be sent to IRS to prevent violations of the automatic stay. Send notification to:
Internal Revenue Service
Centralized Insolvency Operation
P. O. Box 7346
Philadelphia, PA 19101-7346
  • IRS notices are sent to the last known address. This address is determined by the most recently filed tax return, Form 8822, Change of Address, or change of address information obtained from the United States Postal Service. As an official National Change of Address licensee of the USPS, the IRS receives weekly updates of change of address information.
  • Bankruptcy does not prohibit issuance of all IRS notices, and not all IRS notices violate the automatic stay. Some notices, for example inquiries concerning unfiled returns, will continue to be sent to the debtor’s last known address.
  • For individual debtors, the last known address should always remain the debtor’s address. Returns should not be filed “in care of” the trustee. Doing so will change the debtor’s address to that of the trustee and all IRS correspondence relating to that taxpayer will be sent to the trustee.
  • In cases not involving an individual debtor, the debtor’s IRS address of record will be changed to the trustee’s address if the trustee:
    • files a debtor’s tax return in care of the trustee at the trustee’s address, or
    • files a change of address for the debtor with the USPS, or
    • files a Form 8822, Change of Address, with the IRS.
Any of the above will result in all future IRS correspondence being sent to the trustee.
Treas. Reg. §301.6212-2 and Rev. Proc. 2010-16, provide guidance on the procedures for making a change of address and explain the requirements for giving the IRS “clear and concise notification” of a change of address.
·         IRS notices concerning taxes incurred by bankruptcy estates of individuals in chapter 7 and 11 cases, which file separate Form 1041returns, are properly sent to the bankruptcy trustee. Notices will continue to be sent until the liability is satisfied or the statute of limitations for collection expires.
  • Certain penalties may apply to returns filed by the trustee for taxes owed by the bankruptcy estate. The penalties may be waived if the Bankruptcy Court finds there are insufficient funds to pay administrative expenses. Contact the Centralized Insolvency Operation at the phone number below if you believe any of the penalties should be waived.
  • If you have questions regarding a case where IRS is listed as a creditor, contact the Centralized Insolvency Operation. Be prepared to provide the debtor's bankruptcy case number or taxpayer identification number. The IRS may only disclose the information permitted by I.R.C. section 6103.
  • Call (800) 973-0424 to reach the Centralized Insolvency Operation. Hours are 7 a.m. to 10 p.m. eastern time.

xamples of Bankruptcy Fraud Investigations - Fiscal Year 2012

The following examples of bankruptcy fraud investigations are written from public record documents on file in the court records in the judicial district in which the cases were prosecuted.

Las Vegas Real Estate Agent Sentenced for Tax and Bankruptcy Fraud

On April 9, 2012, in Las Vegas, Nev., German A. Posada was sentenced to 18 months in prison and ordered to pay $212,016 in restitution to the IRS and $24,628 in restitution to victims of the bankruptcy fraud.  According to court documents and statements made in court, Posada admitted to filing a false individual income tax return for 2004 that under-reported the income from his business as a real estate agent.  Between 2003 and 2005, Posada earned commission income from International Realty and another realtor.  He asked that International Realty issue some of his commission checks in the name of his then-girlfriend and deposited those checks into a bank account in her name.  Posada also admitted under-reporting his business income on his 2003 tax return, failing to file a timely 2005 tax return and failing to report the approximately $557,212 in income that he received in 2005.  In addition, court records establish that in 2005, Posada filed for bankruptcy in the U.S. Bankruptcy Court for the District of Nevada.  In his May 13, 2005, and August 2, 2005, bankruptcy petitions, he made false statements, including that he had no current income, he had received no income during the two years immediately preceding 2005, and 17 creditors held unsecured non-priority claims totaling $466,885 against him.  Then, on September 2, 2005, at a meeting of creditors, Posada falsely testified under oath before the bankruptcy trustee that he had received “one or two” and “probably two” commissions since May 13, 2005, when in fact he knew that he had received at least 19 commission checks totaling $130,575 during that time period.

Maine Man Sentenced for Bankruptcy Fraud

On March 13, 2012, in Bangor, Maine, George F. Rayner, of Baileyville, Maine, was sentenced  to one year and a day of in prison and one year of supervised release for bankruptcy fraud. On December 7, 2011, a jury found Rayner guilty of the offense. According to evidence introduced at trial, Rayner and his wife filed for bankruptcy reorganization in May 2006. In his bankruptcy filings and testimony, he concealed from the Office of the United States Trustee and his creditors a savings bank account; a deferred compensation retirement account worth $150,000; and the fact that he was entitled to reimbursement for accrued, but unused, sick leave and vacation time benefits. He also failed to report a $97,000 lump-sum distribution from his retirement account and the payment of about $12,000 for his unused benefits. Rayner was required to report these amounts to the Office of the United States Trustee in monthly operating reports.

Former Loan Officer Sentenced on Mortgage Fraud and Bankruptcy Fraud Charges 

On March 7, 2012, in Phoenix, Ariz., Paige Kinney, aka JamieLee Lawler, was sentenced to 180 months in prison and ordered to pay $22,000,000 in restitution. Kinney pleaded guilty in May 2011 to various charges related to a mortgage fraud scheme and to charges of bankruptcy fraud, wire fraud, mail fraud, and bank fraud in two separate indictments.  According to court documents related to the first indictment, Kinney played a leadership role in a $40 million mortgage fraud scheme that targeted Countrywide Home Loans and other lenders. According to Kinney’s plea, from January 2005 through December 2007, Kinney and others used unqualified straw buyers to purchase properties, knowing that the straw buyers did not intend to live in the homes or be responsible for the loan payments.  Kinney would obtain mortgage financing to purchase homes in the names of the straw buyers by submitting fraudulent mortgage loan applications and altering documents, such as bank statements, to misrepresent the straw buyers’ assets, income, and employment status.  Based on these misrepresentations regarding the buyers’ ability to qualify for loans, lenders issued loans that exceeded the homes’ sales prices. Once the funds were obtained from the lenders, the extra proceeds, known as “cash-back,” were directed to bank accounts that Kinney controlled. In total, Kinney caused lending institutions to issue $38,745,215 in fraudulent loans.  According to her plea agreement on the second indictment, Kinney declared bankruptcy and then attempted to hide assets and liabilities from the Bankruptcy Court by falsifying her name and social security number. Kinney also committed additional financial fraud by arranging for friends to fraudulently obtain a loan to purchase a Mercedes. In addition, she committed insurance fraud by staging a phony burglary of her residence and then collecting $130,000 from Allstate Insurance Company.

Optometrist Sentenced for Tax Evasion and Bankruptcy Fraud

On February 9, 2012, in Springfield, Mo., Leslie MacLaren was sentenced to 39 months in prison and ordered to pay $334,003 in restitution for evading income taxes and filing a false tax return.  According to court documents, MacLaren claimed a $40 million refund.  MacLaren, an optometrist, attempted to evade obligations of approximately $161,773 in various ways, including concealing income and hiding assets. Hidden assets included a three story house on more than six acres, which he titled in his mother’s name, and three vehicles, which he purchased and titled under the name of a fictitious company. Further, he filed a fraudulent bankruptcy petition, resulting in the discharge of back tax liability for the years 1993 and 1995 to 1998. MacLaren also attempted to evade income taxes for the years 2003 through 2006 by failing to file returns, avoiding the use of banks – dealing mostly in cash – and by listing eight dependents and claiming exemption from withholding on an IRS Form W 4 that he provided to a former employer.  In addition to the tax evasion counts, MacLaren was found guilty of two counts of bankruptcy fraud, one count of submitting a false claim to the United States and one count of obstructing the administration of internal revenue laws.

Washington Man Sentenced for Ponzi Scheme and Bankruptcy Fraud

On February 9, 2012, in Seattle, Wash., Fredrick Darren Berg, of Mercer Island, Wash., was sentenced to 216 months in prison and three years of supervised release for wire fraud, money laundering and bankruptcy fraud. The amount of restitution is yet to be determined. Berg is the founder of the Meridian Group of investment funds. The funds represented that $245 million in investor money was invested in real estate contracts and real estate; however, the funds were actually elaborate Ponzi schemes. Berg used investor money for a luxurious lifestyle. According to records in the case, between 2001 and 2009, Berg used more than $100 million from over 800 investors for his own expenses and to keep his investment fraud going. Between 2003 and 2010, Berg diverted approximately $45 million from his investment funds without his victim’s knowledge or permission.  In 2010, Berg claimed he was cooperating with bankruptcy trustees in his personal and corporate bankruptcies in an effort to help unravel his fraud schemes. Federal investigators learned that he had concealed approximately $400,000 from the trustees and later lied about the source of these funds when confronted by the trustee in his personal bankruptcy. Further investigation revealed the funds came from the sale of a home he had failed to disclose in his bankruptcy proceedings and the funds were deposited into a series of bank accounts he concealed from the trustee. (212) 588-1113

No comments: