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