Strategy – File Two 1040’s in the Same Year Using Tax Code 1398D

Bernie Gartland

Bernie Gartland

Today, we’re going to talk about a statute: Internal Revenue Code section 1398 (d) of the Internal Revenue Code. Not the bankruptcy code; Section 1398 (d) of the Internal Revenue Code. I wrote an article some time ago. And by the way, if you Google 1398 (d) of the Internal Revenue Code, my article will come up, so you can have advanced knowledge of what we’re talking about. But what does 1398 (d) say?

1398 (d) says you can file two 1040s for the same year. I did not say an amendment, I said two 1040s for the same year. Now, how many professionals out there, that you know, do know about section 1398 (d)? Probably none. But let’s go into how you can save your home. Now, what I’m going to do is break this blog into two segments. I’m going to present to you one fact situation today, and I’m going to give you a remedy that the quote, “normal or uninformed practitioner,” will end up doing for you. And then in the next blog, I will tell you what we would do in strategizing for you with that concept of filing two 1040s for the same year.

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Okay, here’s a fact situation. You know right now that small businesses, mom and pop, self-employed type of people, you’re getting hit with health, finances that are problematic because of employees and Obamacare, et cetera. You’re also getting hit with higher prices in construction, et cetera. So you may want to work for yourself, but the economy is such that, “Hey, I can’t make it. I’m going to have to go find a job somewhere.”  So what happens is, let’s give you my hypothetical.

You work for, as a sole proprietor, from January to June the 30th. And on June the 30th, you say, “I give up. I’ve earned some money, and I’m going to owe some taxes on my money, but I also am in debt up to $80,000 and climbing. I can’t afford it. What do I do?” So on July the 1st, you go out and you get yourself a W2 job. Now, you then say, “What am I going to do? I am gonna go see a bankruptcy attorney.” So you go to the bankruptcy attorney. The bankruptcy attorney says, “Listen. So you closed your business down. You’re now working as a W2 employee. And oh, by the way, you took 9 exemptions?” You say, “Yes, because I need the money.” The bankruptcy attorney says, “All right. That’s all right. We will now file a chapter 7 bankruptcy. Oh, by the way, you had some trucks, and you had some inventory, and you had a couple of presses, and you had something else that you have about $20,000 worth of non-protected assets in your bankruptcy. Non-protected.” So, that means the trustee can sell and give to creditors.

Now what happens is, the, the chapter 7 bankruptcy attorney files bankruptcy, lists down all your debts: Visa, MasterCard, JCPenney, judgments of $80,000. The trustee takes the $20,000 of unprotected assets and sells them, and pays off, pro rata, Visa, MasterCard, JCPenneys; all the unsecured creditors. Well, that’s great. Now you don’t owe them. They’re not hounding you. However, at the end of the year, you go to your tax person. They said, “Oh, by the way, you claimed 9 exemptions, and so therefore you don’t have any withholding, and you owe about $15,000 on what you did as a sole proprietor from,  January the 1st to June the 30th.” And now the IRS is going to file lien against your house and come after you.

The next segment, I will tell you why that was an incorrect exam- … Why it was incorrect for them to do it that way. We’ll see you next time. This is Bernie Gartland.

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