Discharging federal taxes in bankruptcy presentation

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

[email protected]

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.