DISCHARGING TAXES IN BANKRUPTCY
TAXES IN BANKRUPTCY
Daniel M. Press © 2013
Chung & Press, P.C.
6718 Whittier Ave. #200
McLean, VA 22101
DISCHARGING INCOME TAX IN CHAPTER 7
requirements to discharge taxes, found in 11 U.S.C. § 523(a)(1) and §
507(a)(8), apply equally to State and Federal income taxes.
income tax is dischargeable, and not a priority debt, if it meets all
of the following requirements:
THE THREE-YEAR RULE [§ 521(a)(1)(A)/§ 507(a)(8)(A)(i)]
date for the return (typically April 15 of the year after the taxable year),
including extensions, is more than three years before the filing date. An
extension to file the return delays the start time.
FOR: Extensions, including automatic extensions; State due dates later than
federal due dates; Due dates extended because they fall on weekends/holidays.
Prior bankruptcy, collections due process hearing (any collections hearing or
appeal that tolls collections), plus 90 days (Lastra v. United States
(In re Lastra), 2012 W.L. 6681739 (Bankr. D.N.M. 2012)). NOT
tolled by Offer in Compromise (In re Paradis, 477 B.R. 295 (Bankr. D. Me.
2012)), nor by installment agreement.
that fails the 3-year test is a priority debt, and is not dischargeable.
THE TWO-YEAR RULE [§ 523(a)(1)(B)]
return or equivalent report or notice, if required, has been filed or given
either on time (including extensions) or at least two years before the
filing date of the bankruptcy.
FOR: What is a “return?” What is an equivalent “report or
hanging paragraph following § 523(a)(19), a "return" means a return
that satisfies the requirements applicable of non-bankruptcy law. It includes
SFRs prepared pursuant to IRC § 6020(a), but not SFRs pursuant to §
6020(b). See Moroney v. United States (In re
Moroney), 352 F.3d 902 (4th Cir. 2003)
(Once an SFR filed, a subsequent "return" is still not a
FOR: State tax: The required report after a federal audit adjustment is
the equivalent of a return. In re Ciotti, 638 F.3d 276 (4th
TOLLED under the Code by prior bankruptcy, OIC, CDP, etc. BUT:
IRS takes the position that equitable tolling applies. See below.
the 2-year rule makes the tax non-dischargeable, but does not make it a priority
THE 240-DAY RULE [§ 521(a)(1)(A)/§ 507(a)(8)(A)(ii)]
was assessed at least 240 days preceding the filing date of the bankruptcy,
EXCLUDING the time an Offer in Compromise was pending or in effect (plus 30
days), or a stay of proceedings against collections was in effect due to a prior
bankruptcy case or collections due process hearing (any collections hearing or
appeal that tolls collections), plus 90 days.
FOR: Offers in compromise: If possible, avoid filing until 240 days
FOR: Date of IRS assessment is easily ascertainable from an account
transcript. State taxes may not be so easy.
Form 8821 signed by client.
the Hotline at the IRS Hotline phone number.
Priority Hotline tel. # is (866) 860-4259.
FOR: taxes not assessed but still assessable post-petition (other than those
non-dischargeable due to the 2-year or fraudulent/evasive rules) fail the
A subsequent assessment starts a new 240-day period only as to the additional
the 240-day rule makes the tax a priority debt, and not dischargeable.
NON-FRAUDULENT RETURN, NO WILLFUL EVASION [11 U.S.C. § 523(a)(1)(C).
return in question was not fraudulent and there was no willful attempt to evade
or defeat the tax.
or evasion makes the tax non-dischargeable, but does not make it a priority
TRUST FUND TAXES (EMPLOYEE SHARE 941's, MOST SALES TAXES) ARE NEVER
TAX IN CHAPTER 13
tax fails the 2-year rule, or is fraudulent or evasive, the tax is not
discharged (even if paid in full, interest still accrues).
Otherwise the tax is dischargeable in a Chapter 13. BUT ...
priority taxes must be paid in full (assuming the taxing authority files a proof
not self-file a proof of claim for a dischargeable tax (unless your client wants
insurance against owing it if the case dismisses or converts)!
other than in compensation for actual pecuniary loss (i.e., basically all
penalties except trust-fund recovery penalty) are not priority debts. They
are dischargeable in chapter 13. In chapter 7, penalties are dischargeable
if the transaction or event for which the penalty is assessed is over 3 years
old. 11 U.S.C. § 523(a)(7)(B).
LIENS IN BANKRUPTCY
survive bankruptcy but, if the tax is
discharged, do not attach to after-acquired property.
liens attach to exempt property, including entireties property and
“non-estate” property such as 401(k) accounts and 529 plans.
liens can be stripped down/off under 11 U.S.C. § 506.
on tax liens must be paid at the statutory rate. 11 U.S.C. § 511.
liens are subject to subordination to other priority claims. 11 U.S.C. §
more information, see IRS Publication 908, Bankruptcy Tax Guide
Is the two-year rule subject to equitable tolling?
In Young v. United States, 523 U.S.
43 (2002), the Supreme Court held that the pre-BAPCPA three-year rule was
subject to equitable tolling based on the pendency of a prior bankruptcy
“codified” this holding in BAPCPA, but only did so in 507 with respect to
the priority taxes (the 3-year and 240-day rules). The statute says
nothing about tolling the 2-year rule. Thus, under inclusio unius,
exclusio alterius, Congress intended to only toll those provisions and not
the 2-year rule. However, the IRS has begun to take the position that a
prior bankruptcy (and perhaps other events such as CDP hearings/appeals)
equitably tolls the two-year rule.
is no case law on this point at this time.
Is a late filed return a “return” for purposes of triggering the start of
the 2-year rule? This would seem
pretty obvious, because the two-year rule exists only with respect to late filed
returns. But the 5th Circuit in In re McCoy, 666 F.3d
924 (5th Cir. 2012) held that a late-filed return is not a
“return” and thus the tax is never dischargeable.
§ 523(a)(1) (B) excepts taxes “with respect to which a return, or
equivalent report or notice, if required— (i) was not filed or given,
or (ii) was filed or given after the date on which such return, report, or
notice was last due, under applicable law or under any extension, and after two
years before the date of the filing of the petition.”
523(a) hanging paragraph, added by BAPCPA, provides:
purposes of this subsection, the term "return" means a return that
satisfies the requirements of applicable nonbankruptcy law (including applicable
filing requirements). Such term includes a return prepared pursuant to
section 6020(a) of the Internal Revenue Code of 1986, or similar State or local
law, or a written stipulation to a judgment or a final order entered by a
nonbankruptcy tribunal, but does not include a return made pursuant to section
6020(b) of the Internal Revenue Code of 1986, or a similar State or local law.
the bold portion, the 5th Circuit included the deadline in
“applicable filing requirements” and found that once late, a return is not a
IRS disagrees with McCoy, I.R.S.
Chief Couns. Notice No. CC-2010-016, but that does not mean that it won’t take
advantage of it where it applies.
that if a return is not filed, one can comply with § 6020(a) (or similar state
law) and cooperate with the IRS to file a late taxpayer-signed SFR return:
Preparation of return by Secretary.—If any person shall fail to make a return
required by this title or by regulations prescribed thereunder, but shall
consent to disclose all information necessary for the preparation thereof, then,
and in that case, the Secretary may prepare such return, which, being signed by
such person, may be received by the Secretary as the return of such person.
will clearly be a “return” to allow discharge after 2 years.
cases outside the 5th Circuit are split:
with McCoy (note that many of these are SFR cases, so the McCoy issue
is effectively dictum):
re Cannon, 451 B.R. 204 (Bankr. N.D. Ga.
re Shinn, http://scholar.google.com/scholar_case?case=14187889298013115152
(Bankr. N.D. Ill. 2012);
v. United States (In re Links), 2009 WL
2966162 (Bankr. N.D. Ohio Aug. 21, 2009);
re Perry, http://scholar.google.com/scholar_case?case=7522075598669202991
(Bankr. N.D. Ala. 2012);
re Pendergast, http://scholar.google.com/scholar_case?case=2046306500215678217
(Bankr. D. Mass. 2013)
re Rhodes, A.P. No. 11-4074 (Bankr. N.D.
Ga. May 6, 2013)
re Martin, 482 B.R. 635 (Bankr. D. Colo.
re Brown, 489 B.R. 1 (Bankr. D. Mass.
re Perkins, A.P. 12-3030 (Bankr. D. Mass.
re Pitts, A.P. No. 12-1191-SC (Bankr. C.D.
Cal. Aug. 14, 2013)
are no opinions from the 4th Circuit on this issue.
3. How much tolling for multiple tolling events?
States v. Montgomery (In re Montgomery),
475 B.R. 742 (D. Kan. 2012): One 90-day period for multiple prior bankruptcy
How about post-petition taxes coming due during a prior Chapter 13?
Because the automatic stay did not prevent
them from being collected, tolling does not apply. In re Kolve, 459
BR 376 (Bankr. W.D. Wis. 2011). But see In re Tarby, http://scholar.google.com/scholar_case?case=12477894279944954130
(Bankr. D.N.J. 2012) (despite re-vesting, stay did preclude collection, so
IRS Form 4506-T to request transcripts.
a joint return, and either spouse did anything separately that could
affect tax dischargeability dates, the you need to request a “non-master
file” transcript. This takes time, and should be done with a live human
being on the phone.
Practitioner hotline: 866-860-4259
Virginia Department of Taxation
of Customer Services
want to run the numbers yourself?