This document summarizes a presentation on discharging federal taxes in bankruptcy and other alternatives. The presentation covers: (1) bankruptcy procedure and how it creates a separate bankruptcy estate entity, (2) rules for discharging taxes including the three-year and two-year rules, (3) methodology for determining dischargeability, (4) return filing requirements and treatment of late filed returns, (5) how liens survive bankruptcy, and (6) alternatives to bankruptcy like installment agreements and offers in compromise. Contact information is provided for additional questions.

1. Lunch and Learn
Discharging Federal Taxes In
Bankruptcy and Other Alternatives
Wednesday, September 12, 2012
Presenter: Sidney Goldin

2. I. Bankruptcy Procedure
(Chapter 7 only)

3. Appointment of trustee
• 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.

4. Creation of separate entity
• 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.

5. Automatic stay and other provisions
• 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.

6. 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

7. Exceptions to automatic stay
• IRS can still audit returns.
• IRS can issue deficiency notices and assess tax.
• IRS can require that returns be filed.

8. 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.

9. II. Discharge of Taxes

10. • Three year rule
– Extensions
• Two year rule
• 240 day rule
• Return(s) filed are not fraudulent

11. • Taxpayer does not attempt to evade taxes
• OIC
• Matrix (Illustration)
• Trust fund (payroll) taxes never dischargeable

12. III. Methodology in determining
dischargeability

13. IRS account transcript analysis
• 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

14. Offer in Compromise cases
• Two and three year wait not tolled under
Offer
• Strategy

15. IV. Return filing requirement

16. General rule
• Return must be filed
– Substitute for return can constitute valid return
• Must be signed and dated
• Practical issues

17. Late filed returns
• 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

18. 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

19. 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

20. V. Liens

21. • 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.

22. Notification from IRS after discharge
• Illustration of letter
• Types of pre-petition property not liquidated or
sold by trustee (examples)
– Exempt property
– Trustee abandoned property
– Excluded property

23. Amount owed to IRS
• 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).

24. Alternatives for payment
• Short term installment agreement
• Negotiated offer based on difference in value
perception
• Right to appraisal - both IRS and taxpayer

25. VI. Alternatives to Bankruptcy

26. • Installment agreement
• Offer settlement
• Bankruptcy should be last resort

27. For Additional Information Contact
Sidney Goldin, CPA
Goldin Peiser & Peiser, LLP
Sgoldin@GPPcpa.com
214-635-2509
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.