Consumer Bankruptcy Journal Winter 2016 - Page 40

TOLLING EVENTS IN TAX DISCHARGE By Morgan D. King, Esq. Morgan King Company & Morgan King Law Offices Dublin, California A ssuming you have at least an acquaintance with the 5 rules that must all be satisfied in order to discharge income taxes1, here are some issues to watch for. Discharge of taxes and interest2 on the taxes is governed by, among other things, three “temporal” conditions. The first two rules addressed here are the 3-year and the 240-day rules, to wit; the most recent due date for the taxpayer to file his or her tax return must be over 3 years before the bankruptcy is filed;3 And, the tax assessment must have occurred over 240 days prior to the bankruptcy.4 The Bankruptcy Code at 11 U.S.C. § 507(a)(8)(G)5 provides that certain events that are typically under the control of the taxpayer may stop the clock on (or “suspend” or “toll”) either or both of these periods. If a client has done any of the tolling events while one or both of the time periods are pending, the respective time period is extended for the time the tolling event is pending6, plus an additional 90 days.7 Prior bankruptcy or IRS Collection Due Process Appeal 40 CONSUMER BANKRUPTCY JOURNAL Tolling events specified in the Bankruptcy Code include a prior bankruptcy, and a prior IRS Collection Due Process Appeal (“CDP”). A literal reading of the Code provides that a bankruptcy or an IRS Collection Due Process Appeal or any other event “… during which a governmental unit is prohibited under applicable nonbankruptcy law from collecting at tax as a result of a request by the debtor for a hearing and an appeal of any collecting action taken or proposed …” Hence a bankruptcy filed less than 3 years from the due date makes the taxes nondischargeable.8 Note that technically it is not a prior bankruptcy per se that tolls either of the time periods, but only the time collection is prohibited, i.e., the time the stay is in effect. For example, in the case of a prior bankruptcy for a one-time serial filer, tolling will expire in 30 days without a court order extending the stay, and in the case of a 2-time serial filer, tolling does not commence at all unless the court orders the stay to be in effect.9 The IRS Collection Due Process Appeal procedure provides that if a taxpayer receives a final notice of intent to levy, he/she has 30 days in which to Winter 2016 appeal the pending levy;10 the appeal is a request for a hearing and an appeal and hence halts collection while the appeal is being processed.11 Be alert that what may be overlooked in some cases dealing with a state income tax that may have something equivalent to an IRS CDP. IRS Offer-in-Compromise A 3rd tolling event prescribed by the Code is an offer-in-compromise12 that is filed while the 240-day assessment period is pending; this event adds the time the offer is pending plus 30 days.13 This is true only as long as the IRS is considering whether to accept or reject the offer, because while the making of any offer halts levies, ordinarily an OIC by itself is not a request for a hearing and an appeal; 14 however, if the OIC is rejected and the taxpayer appeals the rejection, then tolling would occur because, unlike the mere making of the offer, an appeal is a request for a hearing and an appeal and levy is prohibited while the appeal is pending.15 Collection prohibited by confirmed plan The Code also provides that where collection is prohibited by a confirmed plan, tolling may happen in the same National Association of Consumer Bankruptcy Attorneys