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Lunch and Learn
Discharging Federal Taxes In Bankruptcy and Other Alternatives
Wednesday, September 12, 2012
Presenter: Sidney Goldin
I. Bankruptcy Procedure(Chapter 7 only)
• Role is to administer bankruptcy estate
• Trustee may intervene on debtor’s behalf in any court proceeding such as Tax Court or any other legal forum.
Appointment of trustee
• Bankruptcy estate is established when petition is filed • Separate entity – Separate return filed • Bankruptcy estate return (1041) runs from date of
petition to year end.
Creation of separate entity
• Bankruptcy court has jurisdiction over Tax Court • Any decision made by Tax Court while bankruptcy is
pending is void. • Bankruptcy court has authority to determine any tax
liability or penalties attributable to the tax or it can delegate this authority to the Tax Court.
Automatic stay and other provisions
• IRS cannot take enforcement action while case is pending.
– Cannot lien estate – Cannot continue collection action – Levies issued before petition must be released
Automatic stay and other provisions
• IRS can still audit returns. • IRS can issue deficiency notices and assess tax. • IRS can require that returns be filed.
Exceptions to automatic stay
• Previous case pending within one year preceding petition.
– Termination of stay for current case after 30 days
from filing petition. – Two or more cases pending within the year no
automatic stay.
Exceptions to automatic stay
II. Discharge of Taxes
• Three year rule – Extensions
• Two year rule • 240 day rule • Return(s) filed are not fraudulent
• Taxpayer does not attempt to evade taxes • OIC • Matrix (Illustration) • Trust fund (payroll) taxes never dischargeable
III. Methodology in determining dischargeability
• Review of critical filing and assessment dates
• Analysis of events that toll or affect two and three year rules above
– CDP proceedings – Tax Court proceedings – Other proceedings which prohibit IRS from collecting
taxes
IRS account transcript analysis
• Two and three year wait not tolled under Offer • Strategy
Offer in Compromise cases
IV. Return filing requirement
• Return must be filed
– Substitute for return can constitute valid return• Must be signed and dated
• Practical issues
General rule
• Filed before substitute return assessment under 6020(b)– Dischargeable , Casaro V. Bankruptcy Court NY
• Filed after substitute return assessment by IRS– Courts split on treatment after assessment
Late filed returns
– Eighth circuit (Colsen Case) decision citing Beard case • Court rejected IRS’ “bright-line” rule that late filed return
could never constitute return for purpose of discharge• Tax court case in Beard criteria for return qualifications
– Document must contain sufficient data to calculate tax liability,– Document must purport to be a return,– Must be an honest and reasonable attempt to satisfy
requirements of the tax law, and– Return must be executed under penalty of perjury
Late filed returns
• Supreme court may have to decide this issue because of the split in circuits
• Failure to pay tax • IRS attempts to bar discharge fails • Sixth circuit (Storey case) reverses District Court
which sides with IRS• Court rules that failure to pay isn’t willful attempt
to defeat tax
Late filed returns
V. Liens
• Discharge from personal liability
• Filed prior to bankruptcy petition
• Pre-petition lien survives bankruptcy
• Attaches to federal tax lien interest in pre-
petition property, (FMV at time of petition)
within ten year collection statute.
• Illustration of letter
• Types of pre-petition property not liquidated or
sold by trustee (examples)
– Exempt property
– Trustee abandoned property
– Excluded property
Notification from IRS after discharge
• Lesser of unpaid tax liability or amount equal to value of federal tax lien at time of bankruptcy filing (petition)
• FMV is value at time of petition less mortgages or other liens (senior to IRS liens).
Amount owed to IRS
• Short term installment agreement
• Negotiated offer based on difference in value perception
• Right to appraisal - both IRS and taxpayer
Alternatives for payment
VI. Alternatives to Bankruptcy
• Installment agreement
• Offer settlement
• Bankruptcy should be last resort
For Additional Information Contact Sidney Goldin, CPAGoldin Peiser & Peiser, LLP
www.GPPcpa.com
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on
any matter contained in this presentation.