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U.S. corporations are making record profits quarter after quarter, yet unemployment seems to be stuck at a devastatingly high rate. Why aren’t these financially flush big businesses hiring?
I’ve been writing a string of blogs about how tax debts are dealt with in bankruptcy, and I’ll get back to that after today. This is the time of year when the nation’s major corporations report their 3rd quarterly profits, and so I found myself scratching my head about the disconnect between their huge profits and their lack of hiring. So I read a number of news stories and editorials and this is what I got out of them:
1. Big businesses have gotten to be more “productive,” in the sense of producing more goods and services with less labor. That has happened partly through investments in labor-saving technology and partly by requiring employees to work harder and faster for the same pay. With the cut-throat labor market, companies don’t need to increase salaries to retain or replace their employees.
2. Profits have increased because a larger percentage of sales for large U.S. corporations have been overseas. Around 40 per cent of their profits are from foreign sales. For many companies, sales are growing modestly in the U.S. while growing much faster elsewhere, especially in the “emerging markets” of China, India, and South America.
3. Relatively strong overseas sales come with job growth overseas instead of here. According to the U.S. Commerce Department, in the past decade, U.S.-based multi-national corporations added 2.4 million jobs outside the country while cutting 2.4 million jobs here. Jobs naturally grow where sales are growing–someone has to take customer orders at the 3,000+ KFCs in China! But of course there’s also increased foreign outsourcing of work that used to be done here, from manufacturing to computer programming.
4. Normally when businesses are more productive, resulting in more profits, they tend to expand, thus creating more employment opportunities. But this has not been happening for three reasons.
a. With the double-whammy of very high unemployment and loss of home values, U.S. consumers either don’t have the means or the attitude to spend money, so companies are leery about expanding to increase production.
b. The international business environment—particularly the European sovereign debt crises in Greece, Italy and elsewhere—is making big business cautious.
c. Political gridlock in Washington, D.C. makes business planning very difficult. With the Congressional deficit-reduction “super committee” scheduled to issue its report very shortly, big businesses have been sitting tight to see if this “super committee” will come up with its momentous compromise, and what it’ll consist of.
The bottom line: big businesses don’t need to hire to produce the goods and services they are producing, at least within the U.S., and they don’t want to expand and hire here because of lackluster consumer demand and high uncertainty in the world economy and in domestic politics.
The conditions you have to meet to write off an income tax debt actually make sense. And understanding those conditions is a lot easier if you understand the sense behind them.
In my last blog I introduced the four conditions for discharging taxes in a Chapter 7 “straight bankruptcy,” and said I’d explain them in this blog today.
This is made easier by the fact that there is a single principle behind all four of these conditions: bankruptcy law believes that taxpayers who pretty much follow the tax laws should be able to write off their tax debts just like the rest of their other debts, after first giving the IRS (or other tax authority) a sensible amount of time to collect the taxes.
How long is this sensible amount of time? How much of an opportunity do the tax authorities have to collect before you can discharge the tax debt? Each of the four conditions measures this amount of time differently, based on 1) when the tax return for the particular income tax was due, 2) when the tax return was actually filed, 3) when the tax was “assessed,” and 4) whether the tax return that was filed was honest and therefore reflected the right amount of tax debt when it was filed. You must meet all four of these conditions, all four of these measures of time.
Taking them one at a time:
1) Three years since tax return due: Every income tax debt has a fixed point in time when its return had to be filed. That date is extended by a certain number of months if you asked for an extension, but it’s still a fixed point in time, one that can be easily ascertained. So this first condition gives the tax authorities three years to collect, three years from a fixed point not affected by your actions (the timing of filing the return) or their actions (audits, legal disputes).
2) Two years since tax return actually filed: In contrast, this is a time period triggered by your own action. Notice above when I stated the overall principle at work here, I said you must “pretty much” follow the tax law. Thus you can file a tax return late and still be able to discharge the debt if at least two years has passed since you filed the return.
3) 240 days since assessment: Assessment is the tax authority’s formal determination of your tax liability, usually by its review and acceptance of your tax return. Normally an income tax is assessed within a few weeks that it is received, so the 240 days since assessment usually passes way before the above three-year or two-year time periods. But the law has to account for the less common situations when assessment is delayed. So, when a tax is subject to a lengthy audit or litigation, or an “offer-in-compromise” (a taxpayer’s formal offer to settle), and the three-year and two-year periods have passed, the tax authority still has 240 days after assessment to chase that tax debt.
4) Fraudulent tax returns and tax evasion: This last condition essentially says that none of the above time periods are triggered at all if you are intentionally dishonest on your tax return or try to avoid paying the tax in some other way. If you are cheating on your taxes then the tax authority has no opportunity to collect the debt, so you cannot discharge the debt, no matter how old the tax is.
If your tax debt can jump through these four hoops, you should be able to discharge that tax in a Chapter 7 bankruptcy.
But what if you owe taxes which do not meet these four conditions? What if some of your taxes do but others do not? Or what if the IRS has recorded a tax lien? Or if a lot of the taxes came from operating a business, or are not income taxes but some other kind? I’ll tell you about these situations in my next blogs.
You don’t always need to file a Chapter 13 case—with its 3-to-5-year payment plan–to deal with income tax debts. Thinking that you do is a myth, alongside the broader myth that “you can’t write off taxes in a bankruptcy.” Both have a kernel of truth, which is why they persist. It’s true: some taxes cannot be discharged (legally written off) in bankruptcy. But some can. And it’s true: Chapter 13 is often an excellent way to solve tax problems. But that does not necessarily mean it is the best for you. Instead Chapter 7 might be.
Chapter 13 tends to be the better tool if you owe a string of income tax debts including relatively recent ones. Why? Because in this situation Chapter 13 gives you the best of both worlds. First, if you owe recent income taxes which cannot be discharged, you get lots of advantages under Chapter 13, including paying less by avoiding most penalties and interest. That can be a huge savings, especially if you can afford only relatively small payments. Second, if you have older back taxes, these are also wrapped into the Chapter 13 plan, often without you paying any more into your plan, then they are discharged at the end of your case.
But you DON’T NEED the best of both worlds if all or most of your income tax debts are dischargeable. Then Chapter 7, the straightforward “straight” bankruptcy is enough.
So, WHAT ARE the conditions for a specific income tax debt to be discharged in Chapter 7? How are you going to know if Chapter 7 will discharge all or most of your taxes so that it is the right option for you?
Some of the conditions for discharge of taxes are quite straightforward. Some are more complicated. And as you’ll see, some are even purposely vague. So unfortunately it’s not as simple as plugging a particular tax debt into a clear formula to see if it is dischargeable. Determining whether a particular tax debt will be discharged requires the careful judgment of an experienced attorney.
I’ll just list these conditions for discharging income taxes here, and then explain them in my next blog. Don’t be surprised if they sound confusing in this list. It’s true: anything having to do with taxes tends to be complicated!
To discharge an income tax debt in a Chapter 7 bankruptcy case, it must meet these conditions:
1) Three years since tax return due: The applicable tax return must have been due more than three years before you file your Chapter 7 case. And if you requested any extensions for filing the applicable tax returns, you have to add that extra time to this three-year period.
2) Two years since tax return actually filed: Regardless when the tax return was due, you must have filed at least two years before your bankruptcy is filed in court.
3) 240 days since assessment: The taxing authority must have assessed the tax more than 240 days before the bankruptcy filing.
4) Fraudulent tax returns and tax evasion: You cannot have filed a “fraudulent return” or “willfully attempted in any manner to evade or defeat such tax.”
You can see that these are begging for some clarification. For that please come back to read my next blog. Or else call to set up a consultation with me. If you have substantial tax debts, you should definitely get some thorough personal advice. Know your options so you can make an informed choice, about bankruptcy and otherwise.
No wonder people think “bankruptcy can’t help me with my tax debt.” Even attorneys sometimes perpetuate the myth.
A few days ago I saw a video of a bankruptcy attorney being interviewed in what amounted to be an infomercial. He was asked by the interviewer whether there were some debts that can’t be “touched” in a bankruptcy:
Attorney: “Absolutely. Things like child support, alimony, uh, tax debts, student loans. Those generally aren’t dischargeable.”
Interviewer: “So the government’s gonna help you eliminate some of the debt in a bankruptcy. But not the debt to them.”
Attorney: “Not theirs, of course!”
Lumping tax debts in with child support and alimony—which indeed cannot be legally written off, or discharged—is just plain wrong. For him to say that tax debts “generally aren’t dischargeable” while including it with other debts that are never dischargeable, or in the case of student loans very rarely dischargeable, is at best very confusing.
And no question, the merger of taxes and bankruptcy can be confusing, because each of these are rather complicated areas of law. Misinformation doesn’t help.
In my next few blogs, you’ll get some solid answers about what taxes can be discharged and what can’t. The fact is that bankruptcy can discharge taxes of many types and in many situations. Sometimes ALL of a taxpayer’s taxes can be discharged, or most of them. But there ARE significant limitations, which I will explain carefully.
But right now maybe the most important thing to understand is that even as to the particular taxes that may not be discharged, a bankruptcy still usually provides huge advantages in dealing with those taxes. So besides the possibility that you will be able to discharge some or all of your taxes, bankruptcy can also:
1. Keep the taxing authorities from garnishing your wages and bank accounts, and “levying on” (seizing) your personal and business assets.
2. Stop them from gaining greater leverage against you, through tax liens and piling on greater penalties and interest.
3. Avoid forcing you to pay them monthly payments based on totally unreasonable policies (such as giving no consideration to most of your other legal obligations), all the while penalties and interest continue to accrue.
Overall, bankruptcy gives you leverage against the IRS, or state or local taxing authority that you cannot get any other way. It gives you a lot more control over a very powerful class of creditors. And your tax problems are resolved as part of your whole financial package, so you don’t find yourself working hard to deal with your taxes while worrying about being blindsided by other creditors.
I’ll explain all this in my next blogs. Call me in the meantime if you can’t wait, or you know you shouldn’t wait. There is no kind of debt that needs more careful personal attention and advice than tax debts.
A temporary federal law gives renters some protections against getting evicted from their homes when a bank forecloses on their landlord. The “Protecting Tenants at Foreclosure Act” is short—only two pages—and simple: after the completion of a foreclosure of a home or apartment building, the new owners of the property must allow renters to continue staying there for either 90 days or through the end of their lease, whichever is longer. So even with a month-to-month rental, the renter would be allowed to stay for 90 days after the foreclosure. Of course have to pay rent and fulfill their side of bargain while they remain on the property.
Why has this been a problem? The public focus during this long foreclosure crisis has been on the millions of homeowners losing their single family homes. But many of these homes are in fact rented out to others. And there are also many foreclosures of multiunit residences—everything from duplexes to apartment buildings. In fact research by the National Low Income Housing Coalition estimated that “renters represent as many as 40% of the American families who will lose their homes in this crisis.”
While homeowners have long had an established set of protections during the foreclosure process, renters have had virtually none. Renters often had no idea that their landlord had fallen behind on mortgage payments and that their home was being foreclosed. They found out only after the foreclosure sale had occurred and the bank or the new owner shocked them with eviction papers. The “Protecting Tenants at Foreclosure Act” provides at least a modest cushion of time in almost all situations, and the right to the full term of their lease for tenants who bargained for such longer leases.
This straightforward law contains very few exceptions. It does not apply if the tenant is also the owner of the property being foreclosed, or the owner’s spouse, child, or parent. The rental agreement must be genuine, and must provide for payment of rent at about fair market value (or with a legitimate governmental subsidy). Also, if after the foreclosure the new owner intends to live in the home as his or her primary residence, then the tenant must surrender the property after 90 days even he or she has a longer term.
This law is temporary in that it was to expire at the end of 2012. Last year’s financial reform law has extended that expiration to the end of 2014.
Maybe the most important part of the “Protecting Tenants at Foreclosure Act” is that it sets a threshold standard, but also explicitly states that it shall not “affect the requirements… of any State or local law that provides longer time periods or other additional protections for tenants.” During these last two years many states have recognized the need for tenant protections. If you are a tenant in a house or apartment that you are afraid is being foreclosed upon, contact our office to set up a consultation to discuss this and any other financial concerns you may have.
Not only do the majority of the wealthy think that they should be taxed more, so do a majority of Republicans. These are the surprising conclusions of two recent polls.
When the second-richest American, Warren Buffett, wrote an op-ed column in the New York Times a few months ago advocating increased taxes for himself and everybody else with an annual income over $1 million, that wasn’t such a big surprise. He has been pushing similar policies for quite a while. For that matter so has the # 1 richest American, Bill Gates.
But that column by Buffett generated such a firestorm of opposition that it would have been easy to think that he and Gates don’t have much support among their wealthy colleagues. Not true, according to a survey of millionaires taken during October 2011 by the Spectrem Group, “the premier research and consulting firm in the wealth and retirement industry.” More than 67 percent of those millionaires surveyed said that the U.S. economic situation would be improved by increasing taxes on those with more than $1 million in annual income, pretty much what Buffett is advocating.
Well, OK, that’s surprising. But maybe they’re so rich they can easily afford to pay taxes. Or maybe those in the top 1% being made infamous by the Occupy Wall Street folks are not as greedy as they are being made out to be. Or maybe just not that anti-government. As Mark Cuban, another of the ultra-rich, has said straight out in his own blog a couple months ago: “Pay your taxes. It’s the most Patriotic thing you can do.”
Now Gates, Buffett, and Cuban may not exactly be representative of all wealthy Americans. And who knows how reliable that Spectrem Group survey is. But if true, it’s noteworthy that a full two-thirds of millionaires think that if their taxes were higher that would help our economy instead of hurt it.
But what about everyday Republicans? I would have thought that a very strong majority of Republicans would oppose “increasing the taxes paid by people who make more than one million dollars a year.” This was the wording of the question asked in a CNN/ORC poll taken in mid-October. But instead about 56% of Republicans favored increased taxes for these high-earners, while 43% opposed them.
I don’t pretend to know what this means. It may be as simple as an attitude—even among Republicans–of “tax the other guy to plug the deficit.” There are only about 250,000 U.S. households with incomes of more than a million dollars, so they don’t get a lot of votes in a national poll. Whatever the cause for this willingness for a selective tax-increase among the Republican electorate, it seems to reveal a disconnect between them and their single-mindedly anti-tax representatives in Washington.
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