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By now, many have heard the news that well-known former baseball player Jose Canseco recently filed for bankruptcy, mainly to deal with back taxes. What many have not seen, however, is the screed he published on the website, Vice.Com, and titled: "Jose Can Say So - I'm Broke and It's the Government's Fault."

Undoubtedly he intended it as a tirade against the government. But interestingly it also serves very well as a testimonial to the dangers of tax debt I have written about in the website of our DC-based tax and bankruptcy law firm. Some excerpts from his harangue and my comments:

" . . . [I]t's my duty to warn you: It can happen to anyone.

When you owe the government--whether it be state or federal--they are relentless when it comes to getting their money back. They institute incredible penalties and interest that almost makes it seem like they want to enslave you."

I have compared owing taxes to having a financial cancer - particularly because the debt grows at an alarming rate -- on the order of about 25% a year, due to penalties added on top of interest. Every month somebody comes to my office complaining that they had been in a payment plan with IRS (known as an "installment agreement") and "it has not gone down!" The reason is, invariably, that the small monthly payment they are making is not nearly enough to pay the interest and penalties that are accruing, let alone the tax (which is the principal, in this case).

Canseco does a good job in describing what it feels like when a person is literally drowning in tax debt:

"Recovering from something like that is very difficult. It's like swimming in the ocean. Once you get out past 100 yards, it looks like 200 yards and the farther you swim the harder it is to get back to shore; you're just swimming around forever and you can never reach the other side. The vastness just keeps expanding and expanding and expanding, by which I mean penalties and interest. Obviously, I've got issues from the past, but it just becomes so overwhelming that you're not even swimming anymore. You're just underwater, sipping air--sipping life even--through a little straw that's sticking through the surface. It's the most frustrating, unnatural thing I've ever had to go through--constantly being suffocated, choked out, and wondering if I could survive until the next day to make more payments on whatever I could."

Pretty good image huh? And he's not bad on describing the consequences either:

"For the last five or six or seven years I've just been trying to, well... live. I've been evicted from homes, lived in friends' converted garages, and bounced from house to house. Putting money into my account became a terrifying activity because there was a good chance the government would immediately confiscate it."

That's true. That's what happens. The tax debtor starts having to live an underground existence. It's pretty much living in the Third World with no bank account, no ATM, no credit, no nothing.

"Things got to the point where even my daughter Josie--her last name is Canseco--was drained one time. I think she said that they returned it, but anything relating to the Canseco last name became a nightmare. Let me tell you from first-hand experience, the IRS are a bunch of thirsty piranhas. They bled me dry."

True again. Even though the tax liability is legally only that of the debtor's, this type of problem will have an impact on your relationships, in a bad way. I'm sure his daughter is not happy with him, looking up to Daddy, and ready to blow him a lot of kisses. Think about what it will do to your marriage when your partner's account is also wiped out, even if only temporarily, or you can't contribute to the mortgage because your wages and bank account have been seized. It does not win friends.

"The issue is very simple: If you've got friends and family, the more money you make the more you spend on them. So let's say you spend half your money on them and the rest on yourself and the cost of living. It may so happen that during all of that you forget to pay your taxes. And then all of a sudden penalties and interest start to add up, and you're in a pool of quicksand from which you cannot escape."

Here, unfortunately, Canseco goes off into a justification and excuse for his actions. I won't comment on the merits of his arguments. You can read them for yourself. But saying that he "forgot" to pay taxes is an excuse right up there with "my puppy chewed up my homework" from grade school days. He may be able to handle a fastball, but he'll never get this past a judge.

A case like his will present some significant legal issues. According to news reports, the back taxes, which make up the bulk of his total debt, are more than $500,000. The key question is how much of that is non-dischargeable tax debt? I trust his bankruptcy attorney made a detailed analysis before filing and discussed the issues thoroughly with him, like we do in our bankruptcy and tax law firm for our clients in DC, Virginia and Maryland.

If it's not dischargeable, Chapter 7 bankruptcy, which is what he filed, will not help him much. The tax debt will still be there when he finishes. Reorganization bankruptcy could give him the right to pay it back interest-free over time, but given his total debt of $1.69 million, he probably would have to file an individual Chapter 11. Chapter 11 for individuals in DC, Virginia and Maryland is always an option to consider and provides powerful relief, but is complicated, expensive, and at this point in time, changing as judge-made case law defines the new bankruptcy law that went into effect in 2005. Consult only an experienced bankruptcy lawyer.

Finally, given who he is, and the potential revenue streams he has available to him as a celebrity from intellectual property (endorsements, copyrights, etc.) that he could generate, I easily see a lot of objections from his creditors, the US Trustee, the US Attorney, and the Chapter trustee if he tries to walk away from this debt without a financial contribution of some sort.

Unlike a bankruptcy for the average person, this one should be a whole new ballgame.

Good luck, slugger.

For the rest of you, if you have questions, give our tax and bankruptcy firm a call.

Where may a business file bankruptcy? The president of a small family business based in Georgia called me to ask whether his business could file a Chapter 11 bankruptcy in Florida. The business was a Georgia corporation with offices in...

Natalie Hawkins, mother of 15 year old Olympic gold gymnast Gabby Douglas filed Chapter 13 bankruptcy earlier this year in part due to expenses related to her daughter’s training.  The good new is that Gabby just signed a three million dollar endorsement deal with Kellogs and vows that the first thing she is going to do is help her mom out financially.  Way to go Gabby.

http://www.huffingtonpost.com/2012/08/05/gabby-douglas-mother-natalie-hawkins-bankruptcy_n_1744029.html

http://www.essence.com/2012/08/05/gabby-douglas-stands-to-earn-millions-in-endorsements/

Contrary to popular belief, a taxpayer may discharge income taxes in bankruptcy as long as the bankruptcy is not filed too soon after the tax return is filed.  As a general rule, you can discharge income taxes that become due more than 3 years before filing bankruptcy, as long as it has been at least 2 years since you filed the tax return and more than 240 days since the taxes were assessed.
Bankruptcy is a game of timing.  File a case one day too soon and the taxes are not discharged.  File a day later and all of the tax is discharged.  A wise bankruptcy attorney and an educated client will want to verify the assessment date of the income taxes owed by obtaining an Account Transcript for each year taxes are owed.  IRS Form 4506 provides a taxpayer with a free copy of their account transcripts.
To discharge income taxes in bankruptcy, a few rules need to be observed:

1. Only income taxes and taxes on gross receipts may be discharged.  Payroll taxes are not dischargeable in bankruptcy.
2. No Substitute Returns: The taxpayer must actually file the return to discharge the tax.  If the IRS files the return (sometimes called a SFR or “substitute for return”), the tax is not dischargeable.
3. Three-Year Rule: The taxes must have been due more than three years prior to filing bankruptcy.
4. Two-Year Rule: The tax return must have been filed more than two years before filing bankruptcy.  So, if you filed a return a few years after it was due, the return must be on file with the IRS for at least two years before it can be discharged.
5. 240-Day Rule:  The taxes must have been assessed more than 240 days prior to filing bankruptcy.  This rule comes into play when the IRS audits a tax return and assesses additional taxes or penalties.  So, if the IRS audits your return filed 5 years ago and assesses new taxes and penalties, you must wait another 240 days to file the bankruptcy.
6. Fraud & Tax Evasion: If a taxpayer may not discharge taxes when they commit tax fraud or if they willfully evade taxes.
7. Offer in Compromise:  If a taxpayer files an Offer in Compromise before the time rules above have expired, the above timelines are extended by the time an Offer in Compromise is pending plus 30 days.
8. Tax Liens:  As a general rule, bankruptcy cancels debts and not liens.  So, even though a tax may be old enough to discharge, the tax lien will remain on the taxpayer’s property despite receiving a bankruptcy discharge.  In Chapter 7 cases, the mixture of tax liens and assets with equity—regardless of whether an exemption law normally protects the asset—becomes lethal with the application of Bankruptcy Code Section 724(b).   The IRS is not subject to state exemption laws, and Section 724(b) gives the Chapter 7 Trustee special powers to liquidate assets if a tax lien is present.