Discharging Taxes in Bankruptcy and. Avoiding Malpractice in the Process 9/29/2015

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1 Discharging Taxes in Bankruptcy and Avoiding Malpractice in the Process Brought to you by the NACTT Academy A SPECIAL THANK YOU TO OUR PANELISTS Kent Anderson Certified Bankruptcy Specialist, Eugene, OR Larry Heinkel State and Federal Tax Expert, Central Florida Important Issues with Tax Bankruptcies Assets exempt in BK my not be exempt from IRS levy Tax debts are not consumer debts regarding the means test IRS POC s generally reflect entire debt as secured Calling IRS employee who prepared POC can be helpful May want to consider paying tax debt as secured Don t file an Adversary unless you are prepared to litigate 1

2 Important Issues with Tax Bankruptcies cont d Consider use of Form 8821 instead of 2848 Pre-petition tax lien remains attached to all exempt and abandoned property A local revenue officer may be assigned to investigate value of assets Important Issues with Tax Bankruptcies cont d If lien is not being released in a Chpt 7, post-discharge, you may negotiate with IRS Insolvency Unit IRM IRS rarely seizes homestead and has no interest in household furnishings, clothing, low equity cars, etc. 15% of the equity is probably not too low to offer maybe paid over six months Secured Tax Debts Secret lien Generally meets 3 conditions Notice of Federal Tax Lien (FTL) has been properly filed There are one or more assets Assets in which there is equity, but is secured only to the extent of the equity 2

3 Secured Tax Debts cont d FTL attaches to personal property located anywhere if filed properly under state law Only attaches to real property located in the county where the FTL was filed Be sure to check your local recording requirements Remember: only unsecured tax debts are effectively discharged Exemptions from Levy Although exempt in bankruptcy, generally not applicable to IRS Assets exempt from levy by IRS (26 U.S.C. 6334) Wearing apparel and schoolbooks Fuel, provisions and personal effects up to $6,250 Books and tools of the trade up to $3,125 Certain annuity and pension payments Workers compensation Child support payments Small percentage of wages Exemptions from Levy Exempt assets from levy by IRS (26 U.S.C. 6334) cont d Principal residence (IF tax owed is less then $5k) If amount owed is more than $5k, sale of taxpayer s residence must be approved by district court Personal residences and (most) wages are NOT exempt from IRS levy Exemption from levy is not exemption from IRS ability to foreclose the federal tax lien encumbering the property 3

4 Larry Heinkel Kent Anderson Unsecured income taxes are dischargeable if ALL apply: A return was filed (an SFR return is not a return ) 11 U.S.C. 523(a)(1)(B)(i) Returns were filed more than 2 yrs ago 11 U.S.C. 523(a)(1)(B)(ii) Returns were due (with extensions) more than 3 yrs ago 11 U.S.C. 507(a)(8)(A)(i) and 523(a)(1)(A) Taxes were assessed more than 240 days ago 11 U.S.C. 507(a)(8)(A)(ii) and 523(a)(i)(A) There was no fraud or willful evasion 11 U.S.C. 523(a)(1)(C) Priority Tax Debts 507(a)(8) of the Bankruptcy Code provides the following are priority taxes* Newer income taxes Trust fund taxes Unassessed tax *Declared non-dischargeable in Chpt 7 by 523(a)(1)(A) 4

5 No Discharge Tax Debts Certain tax debts in a Chpt 7 under Bankruptcy Code 523 Some survive 7 and must be paid in full in Chpt 13 Priority under 507(a)(8) Tax returns have not been filed Returns filed late but within the 2 yrs preceding bankruptcy (also McCoy issue) Fraudulent returns Willful attempt to evade or defeat the tax due Tolling 3 yr/2 yr/240 days... Easy enough??? But wait, equitable tolling applies Young v. U.S., 535 U.S. 43 (2002) BAPCPA codified concept of tolling in flush language 11 U.S.C. 507(a)(8)(g) See also, Putnam v. IRS (In re Putnam), 503 B.R. 656 (Bankr. E.D.N.C. 2014) Tolling cont d IRS Insolvency Unit applies tolling to the 2-year rule! 5

6 Substitutions for Returns Returns Must be filed more than 2 yrs prior to petition date 11 U.S.C. 523(a)(1)(B)(i) Section 6020(b) of the Internal Revenue Code (U.S.C. Title 26)... the Secretary shall make such return from his own knowledge... Generally an SFR assessment is not a return for bankruptcy purposes Filing a return after an SFR process starts but before the SFR assessment is made, is a dischargeable SFR per the Service IRS Chief Counsel Notice CC Late-Filed, Non-SFR Tax Debts McCoy v. Mississippi State Tax Comm n, 133 S.Ct. 192, 184 L.Ed.2d 38 (U.S. Oct. 1, 2012) Any tax return that does not meet applicable filing requirements (i.e. filed even one day late) does not meet the definition of a return Also adopted in First and Tenth Circuits (In re Fahey, No (First Cir. Feb. 18, 2015); and In re Mallo, WL (10 th Cir. Dec. 29, 2014)) IRS disavows this position see IRS Chief Counsel Notice CC Practical Advice Obtain copies of account transcripts not return transcripts Practitioner s Priority Hotline Fax Form 2848 or 8821 When asked, say yes, I am actively helping my client resolve his tax problems or they will not help you Kent Anderson 6

7 Practical Advice If you represent the person whose name appears second on the tax return, you will probably need the name and SSN of Kent Anderson the person who appears first If the IRS doesn t show a liability as you expect, ask if there is a non-master file account transcript - this is what you will need in abnormal circumstances Treatment in Chpt 7 vs. Chpt 13 The Magic Date If a 7 is filed before the first date all these tests are satisfied, then the tax debt will survive Chpt 7 If a 13 is filed before the magic date, treatment depends on which of the 3 tests is not satisfied Before both the 3 yr and 240 day tests are met, it will be a priority tax debt if it is unsecured After BOTH the 3 yr and 240 day tests are met, but before 2 yr rule is met, then (i) penalties will be discharged, and (ii) tax and pre-petition interest will be treated as a non-dischargeable debt. Automated Tax Discharge Analysis Software Fast, accurate, inexpensive and easy-to-use Provides the magic date, warns about McCoy and SFRs Programmed to provide user with alternative results where tolling of the 2 yr rule would make a difference Two Free Trials Larry Heinkel 7

8 What is a return anyway? Four part test under Beard v. Commissioner, 82 TC 766 (1984) Must purport to be a return Must be executed under penalty of perjury Must contain sufficient data to allow calculation of tax Must represent an honest and reasonable attempt to satisfy the requirements of tax law What is a return in bankruptcy? Second Definition Hanging Paragraph of 523 (added by BAPCPA, eff. Oct. 29, 2005) A return that satisfies the requirements of applicable nonbankruptcy law Prepared pursuant to 6020(a) of the Internal Revenue Code of 1986 Does not include return pursuant to 6020(b) IRC/1986 What is an SFR? Substitute for Return Involuntary Assessment by IRS NoD Notice of deficiency or SNoD (Statutory Notice of Deficiency) IRC Sections 6213 and 6020(b) Debtor has 90 days to file a petition (period suspended in the event of bankruptcy) 8

9 Avoiding Malpractice in the Process A VERY SPECIAL THANK YOU TO OUR EXPERT PANELISTS: Kent Anderson Certified Bankruptcy Specialist, Eugene, OR Larry Heinkel State and Federal Tax Expert, Central Florida 9