Consumer Bankruptcy Journal Fall 2015 - Page 31

TAX DISCHARGE FOR DUMMIES 1. An actual return was filed (an SFR is not a “return” for BK purposes); 2. The return was filed more than 2 years prior to the BK petition date; 3. The return was “due” to be filed more than 3 years prior to the BK petition date (take into account extensions to file, and this has nothing to do with when the return was filed); 4. If there was a later audit assessment, the date of assessment preceded the petition date by more than 240 days; and 5. There was no “fraud” or “willful evasion” involved. That’s it! Meet those tests and the tax is dischargeable. Now, to add a little intrigue, understand that in some manner, those tests are set up to make it fair to the IRS. To give them a decent shot at trying to collect before losing out to bankruptcy. You can’t just file a tax return one day and BK it the next. Not fair to IRS. How long is “fair”? Apparently two years. So one day, an enterprising person with a tax debt decided to “hide out” in a Chapter 13 for a while so IRS couldn’t touch him. Then, after the requisite time had passed, he got out of Chapter 13 and filed Chapter 7. Cute, huh? Yes, but not “fair” to IRS, or so said the United States Supreme Court in the Young decision, which held that the 3-year period was “tolled” while in the protection of Chapter 13. Without boring you with all the details, suffice it to say that BAPCPA statutorily incorporated some tolling provisions applicable to the 3-year and 240-day rules (but, interestingly, not to the 2-year rule). The tolling events are (i) a prior bankruptcy, (ii) a timely-filed request for a CDP Hearing, and (iii) in the case of the 240-day test, an Offer in Compromise. In all instances where statutory tolling applies, the applicable time test is tolled for the entire time of the tolling event, plus 90 days (except for the OIC tolling event, in which case you add only 30 days). While many commentators do not believe tolling should apply to the 2-year rule (various theories, such as “Congress has spoken and if Congress meant for it to apply to the 2-yr rule, Congress is smart enough to have done that” (of course, some people question that assumption)), IRS has taken the position that the Young decision can still equitably toll the 2-year test and is beginning to assert that position. So, unless you want your client to be the “test case” on this issue, you might want to at least look at when a tax debt becomes dischargeable both with and without tolling of the 2-year rule, and maybe err on the side of caution. order your Account Transcripts, get a pad and pencil, a calculator and a calendar for the last few years, and crunch the numbers. It won’t take too long, and there’s a pretty good chance you’ll get all these things right, won’t forget or misapply anything, and won’t miscount the number of days (“is it plus 90 or plus 30”? “Was 2012 a Leap Year?” etc.). Or, you can do what hundreds of other attorneys do and get the Magic Date (the “answer”) on the only web-based software program designed to tell the practitioner the earliest date all these tests are satisfied, including applying tolling where required and offering the user the option of applying tolling to the 2-year test. That is, they use the Tax Discharge Determinator (TDD), found at www. TaxDischargeDeterminator.com. For more about TDD, or if you have any questions about this material, please contact info@ TaxDischargeDeterminator.com . That’s it in a nutshell. Sure, there are some other issues out there beyond the scope of this primer (SFRs and late-filed returns to name a couple), but this should move you far along the spectrum to knowing when and why a tax debt is dischargeable. So National Association of Consumer Bankruptcy Attorneys Winter 2015 CONSUMER BANKRUPTCY JOURNAL 31