FEDERAL AND STATE TAX DISCHARGE
Code 420: Red flag for a “sleeping
assessment”
I often refer to what I call the “sleeping
assessment.” This is where the IRS tax
account transcript24 shows a Code 420
(the start of an audit), but not a 421 (end
of the audit).25 Consider it a red flag to
see the 420 but not a 421; an additional
IRS assessment may be around the
corner, triggering a requirement to
report it to the state. Likewise, if the
3-year statute of limitations to assess
additional taxes has not expired, the
IRS could commence an audit at any
time until the SOL expires.
(Endnotes)
1
Bankruptcy Abuse Prevention
and Consumer Protection Act of 2005
(“BAPCPA”)
2
Seven U.S. states currently
do not have an income tax: Alaska,
Florida, Nevada, South Dakota, Texas,
Washington and Wyoming. Chris Kahn,
Bankrate.com.
3
Ciotti v. Franchot in his
capacity as Comptroller of Maryland,
Case No. 07-13229-JS (Bankr.Md.,
2009)
4
The question was about the
dischargeability of the piggy-back
assessments, not the original liability or
the original tax return.
5
In re Ciotti 638 F.3d 276 (4th
Cir. 2011).
6
Green v. IRS 472 B.R. 347,
364 (Bankr. 347 (Bankr.W.D.Tex. 2012
(“The purpose of the “… equivalent
report or notice” language in § 523(a)
(1)(B) is to preclude the discharge of
debt when the debtor failed to file a
report or notice that was required in
addition to a tax return.”)
7
In re Ciotti 638 F.3d 276 (4th
Cir. 2011); In re Green, 472 B.R. 347
18
CONSUMER BANKRUPTCY JOURNAL
(Bankr.D.Tex. 2012); Berry v. Mass.
Dep’t of Revenue v. Berry (In re Berry)
(Bankr.Mass., 2016); In re Nilsen, 542
B.R. 640 (Bankr.Mass. 2015); Moffitt v.
Massachusetts (In re Moffitt) (Bankr.
W.D. Ky., 2013); McBride v. City of
Kettering (In re McBride), 542 B.R. 788
(Bankr.S.D.Ohio, 2015); Pendergast
v. Mass. Dep’t of Revenue (In re
Pendergast) (Bankr.Mass., 2013); In
re Shorton, 375 B.R. 26 (Bankr. Mass
2007); Blalock v. Miss. Dep’t Rev.’ 537
B.R. 284 (Bankr.S.D.Miss. 2015)
8
See In re Green, infra., Nilsen
v. Mass. & IRS 542 B.R. 640 (Bankr.
Mass 2012), Perry v. U.S. 500 B.R. 796
(Bankr.M.D.Ala. 2013).
9
In re Jerauld, 208 B.R. 183
(B.A.P. 9th Cir., 1997) (failure to file a
state-required report is not the same
thing as failing to file a return).
10
In re Jerauld 208 B.R. 183
(B.A.P. 9th Cir., 1997)
“ … we hold that the failure to file a
report is not the same as a failure to
file a required tax return, the claim of
the FTB is not excepted from discharge
under § 523(a)(1)(B)(i).”
11
In re Dahmer, 336 B.R. 784
(Bankr. W.D. Mo., 2006)
12
Olson v. IRS, North Dakota
Tax Department, 174 B.R. 534 (Bankr.
ND 1994) (relevant statutory language
referred to “ … an amended return” or
providing “other information.”) (Olson is
a pre-BAPCPA opinion and may not be
relevant in more recent cases.)
definition of a return based on Beard V.
Commissioner of Internal Revenue (82
T.C. 766 (1984). See the author’s web
page, LateFiledReturn.com.
17
Defining a “return” in an IRS
context typically centers on whether
it was timely filed (the McCoy issue)
or filed in good faith following an IRS
assessment. E.g., Earls v. IRS 549
B.R. 871 (Bankr.Ohio 2016).
18
Beard, supra
19
McCoy v. Mississippi State
Tax Comm’r 666 F.3 924 (5th Cir. 2012)
20
E.g., Perry v. U.S. 500 B.R.
796 (Bankr.M.D.Ala. 2013) (“No matter
what theory the court applies the result
is the same.”)
21
Also qualifying as a “return” is
a “written stipulation to a judgment or
order” 11 U.S.C. § 523(a)(19) (hanging
paragraph). Green v. IRS 472 B.R. 347,
361 (Bankr.W.D. Tex 2012).
22
11 U.S.C. § 507(a)(8)(A)(ii).
23
Arkansas attorney Reba
Wingfield, frequent lecturer at King
Bankruptcy Academy, reminded me of
this potential problem.
24
The IRS “Account Transcript,”
not a “transcript of return.”
25
This refers to IRS transaction
code “420” that appears on tax
transcripts for years that were audited.
Code 420 indicates an audit was
commenced.
13
Berry v. Mass. Dep’t of
Revenue (In re Berry) (Bankr.Mass.,
2016)
14
Berry, at 7, 8.
15
In re Fahey 779 F.3d 1 (1st. Cir.
2015). This opinion focuses primarily
on the McCoy issue.
16
The requirement to sign the
document under penalty of perjury
is one of the four prongs of the
Fall 2016
National Association of Consumer Bankruptcy Attorneys