Discharging Taxes In Bankruptcy

Posted by Isaac Nicolay | Posted in Credit Report | Posted on 20-08-2010

According to the National Bankruptcy Center approximately 1.4 million bankruptcies were filed in 2009, a 32% increase over 2008. They included Chapter 7 bankruptcy filings, which increased 42%, and Chapter 13 filings, which increased 12%. Bankruptcies in 2010 may be fewer than last year. However, in early January, The Wall Street Journal reported that bankruptcy attorneys had not yet experienced a slowdown in their workload. CPA clients may be among those needing bankruptcy protection. Many of these clients may benefit from including federal tax debts in their petition. CPAs can play a key role by assisting clients and their attorneys in determining if and when bankruptcy is a viable alternative for resolving federal tax liabilities, by determining the composition of tax amounts owed and which tax liabilities might be dischargable, and by exploring the many bankruptcy alternatives for dealing with lax debts. Besides being aware of the tax resolution options of bankruptcy described in this article, CPAs should be familiar with administrative tax resolution methods, which the client should pursue first. These include innocent spouse relief, a request for abatement of penalties, an installment agreement or an offer in compromise (OIC).

If those options are insufficient, bankruptcy may be the best way for your clients either to secure a reasonable payment plan (Chapter 1 1 or Chapter 13) or to liquidate their assets to pay off all or a portion of their tax debt (Chapter 7). Using administrative tax resolution methods instead of bankruptcy may help clients avoid having a “black mark” on their credit history. However, a federal tax lien listed on the debtor’s credit report may damage his or credit.

NOT ALL TAX DEBTS DISCHARGEABLE

To be dischargeable, individual income lax liabilities must meet the Bankruptcy Rules attributable to 11 USC Section 523(a) and 11 USC 507(a)(8):

* More than three years must have elapsed since the tax return generating the liability was due, including extensions. Various acts such as prior bankruptcies, collection due process (CDP) hearings, innocent spouse relief and lax assistance orders can extend the three-year lime frame.

* The tax return must have been filed more than two years earlier than the bankruptcy petition (generally applicable to late-filed returns). Note, however, that IRS prepared “substitute returns” are not considered filed returns for this purpose, and thus a tax liability assessed from them would not be subject to discharge (IRC [section] 6020(b)). Therefore, il is almost always advisable for the client to file all delinquent returns and, if possible, let the pertinent time frames pass before the bankruptcy petition is filed.

* At least 240 days must have elapsed since the date of an IRS assessment (generally applicable to audit adjustments and amended returns). This lime frame is extended by an OIC.

Filing fraudulent returns or willful attempts to evade or defeat tax also can prevent such taxes from being discharged (11 USC Section 523(a)(1)(C)). Certain other taxes, including withheld payroll taxes, the trust fund penalty under IRC [section] 6672, most slate sales taxes and certain excise taxes, are never dischargeable. Such nondischargeable taxes may also be priority debts under 1 1 USC [section] 507(a)(8).

Tax debts that meet the three-year and 240-day rules of 11 USC Section 507(a)(8) but do not satisfy the two-year filing rule of 1 1 USC [section] 523(a)(1)(B) are not priority debts, but they are nonetheless nondischargeable.

Unpaid nonpriority tax debts used to be dischargeable upon completion of a Chapter 13 payment plan, but the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 repealed the Chapter 1 3 “superdischarge.”

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ontact Steven Peck’s Premier legal toll free at 1.866.999.9085 to talk to an experienced California Bankruptcy Attorney and visit us online at www.premierlegal.org.

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