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The IRS and bankruptcy fraud


You know it as the faceless organization behind all those numbers subtracted from your paycheck, but for those who are considering bankruptcy, it pays to understand just what impact the Internal Revenue Service could have on you.

The IRS is a party to more than 40 percent of all bankruptcy cases, primarily because past due taxes are fairly common. If the collection of last year's taxes is the only reason they are listed as a creditor, then everything should work out just fine. However, those who have attempted to bury assets to avoid tax obligations in conjunction with a bankruptcy typically lose more than a decent credit standing. They lose their freedom. For example:

  • In May of this year, just a few weeks ago, a San Diego man was sentenced to 10 months in prison and four months in a residential re-entry center and three years of supervised release because of bankruptcy fraud in 1999 in conjunction with tax evasion from 2000-2002. In addition, the court ordered him to pay more than $500,000. This gentleman eventually admitted in court that he deliberately omitted from his bankruptcy petition the fact that he filed state and federal tax returns before filing bankruptcy. He was expecting a refund of $8,000. And, he failed to declare close to $800,000 in taxable income in 2000.
  • A father and son team in West Virginia are serving 57 months and 24 months, respectively, for trying to defraud the government of tax income and multiple counts related to filing bankruptcy on behalf of their pipeline contracting company. These two basically ran the gamut of corporate criminality, healthcare benefit schemes, charging millions in personal expenses to the company; issuing bogus payroll checks; obstructing tax investigations by hiding records; re-issuing expense checks to employees that were actually portions of their current salaries and eventually, hiding from the bankruptcy court the fact that profits from the sale of company-owned oil wells (presumably to the benefit of the bankruptcy plan) simply went back into another shell company they created and tried to disguise.
  • In a much simpler case in California, a chiropractor is now in jail for 11 years for simply hiding assets from the bankruptcy court. He decided that it would be easy to hide the fact he owned an airplane, a truck and a profitable interest in a 220-acre ranch. He also bent over backwards to hide the majority of income he received from selling his business by providing the bankruptcy trustee with a forged contract for substantially less than for what the business was sold.

There doesn't need to be any sort of real moral to these stories, as the message is pretty clear: trying to defraud a bankruptcy judge is one thing; trying to sneak by the IRS is something completely different. There is simply no sense in adding federal charges to what may be a common and very helpful bankruptcy process.

While tales of bankruptcy fraud may sound like something out of a crime novel, the truth is that people who undermine the court do a terrible disservice to the benefits of bankruptcy. Not only do such actions initiate additional laws that could further hamper a person's ability to file for financial protection, they simply perpetuate the stereotype that bankruptcy is something we should stay away from at all costs. Which isn't true.

Maybe there is a lesson here. Perhaps its about being open and honest with yourself about spending, the occasional mistake (we all make them) and the ability to admit we need help.

Are you a good, honest, hardworking person, simply strapped with too much debt? Get a checkup and, if need be, a bankruptcy tuneup with an experienced bankruptcy attorney. Whether you end up filing bankruptcy or not, it pays to know your rights, all your options, and what you can and cannot do legally. You'll be a good way.

In North Carolina, you have available the experience you need. The Law Offices of John T. Orcutt have helped over 30,000 families get out of debt and back on their feet. They serve 28 counties in North Carolina and offer a free consultation out of 4 different locations: Raleigh, Durham, Fayetteville and Wilson. Make an appointment. You'll be glad you did. During normal business hours, just call toll free to 1-888-234-4181. At night and on weekends, you can set up your own appointment "online" by visiting their website at

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