Consumer Bankruptcy Journal Fall 2016 | Page 42

WHEN TAX RESOLUTION IS BETTER THAN BANKRUPTCY By Irina N Bobrova, MST, EA, CAA, NTPI Fellow COO with PitBullTax Software · B ankruptcy is a very powerful tool in discharging consumer debts. When it comes to tax liabilities, however, it may not be the best case scenario. Why? Because not all tax debts can be discharged in bankruptcy, even if a taxpayer qualifies for Chapter 7. Here is a list of all factors to consider when trying to discharge tax liabilities: · Three Year Rule. The bankruptcy must be filed more than three years after the tax return was due to be filed, including extensions. That means that the liability on the most recent 3 tax years cannot be discharged. · Two Year Rule. The bankruptcy must be filed more than two years after the tax return was actually filed. This rule automatically closes the bankruptcy door for non-filers. More so, if the IRS files Substitute for Return (SFR) on behalf of the taxpayer, it precludes a discharge for those tax periods, even if the taxpayer files the original returns after SFRs (see Hindenlang, 164 F.3d 1029). In McCoy, 666 F.3d at 930, the Fifth Court of Appeals decided that the “applicable 42 CONSUMER BANKRUPTCY JOURNAL · · · filing requirements” verbiage in the hanging paragraph of IRC §523(a) enacted in BAPCPA of 2005 precludes a bankruptcy discharge of tax liabilities on late-filed returns, even 1-day late. The McCoy case dealt with state taxes though, and other courts have followed a different approach in interpreting what constitutes a return, concentrating more on the substance of a return rather than the time of filing. 240-Day Rule. The bankruptcy must be filed more than 240 days after the tax was assessed. This rule is usually important when a taxpayer is audited and additional tax liability is assessed, especially when a larger chunk of tax is assessed after audit, than was reported on the original tax return. Fraud. If a penalty for filing a fraudulent return was levied, such tax period is not eligible for bankruptcy. Criminal fraud also negates the bankruptcy route. Tax Liens. Liens will survive bankruptcy until the collection statute expires (10 years from assessment date, but usually extended by various tolling events, i.e. bankruptcy, offer in compromise, CDP hearing, pending installment agreement, etc.). If your client cannot wait for their lien release until the CSED (Collection Statute Expiration Date), bankruptcy is not the best alternative. Prior bankruptcies. If a taxpayer filed Chapter 7 bankruptcy in the last eight years, they are not eligible for a new bankruptcy filing. For Chapter 13 bankruptcy the time limit is two years. There are additional rules when jumping from Chapter 7 to Chapter 13 and vice versa. Fall 2016 So what happens when some of the factors described above come into play, where bankruptcy is not a viable option? The answer is simple – Tax Resolution! There are three main avenues for resolving a tax debt case: 1. Offer in Compromise, 2. Installment Agreement, and 3. Currently Not Collectible Status. Let’s discuss briefly each alternative. Offer in Compromise. Contrary to common belief, the acceptance rate on an Offer in Compromise (OIC) is not that low, statistically it is in the mid-30s. Of course, not all taxpayers qualify for this option, not unlike Chapter 7, but those who do can settle their tax debt for pennies on the dollar. The best advantage over bankruptcy is that you can file an OIC for any tax period as long as the tax is assessed, even if it’s assessed based on SFRs. There is no time limitation. Tax liens are released within 30 days after Offer in Compromise terms are met, i.e. when the taxpayer pays the offered amount in full. Collection activities stop when you file an OIC, so no more bank levies or wage garnishments. The offer amount is calculated based on the reasonable collection potential of the taxpayer plus any available equity in the assets owned. Offers can be paid in 2 different ways: 1. A Lump Sum Cash offer is paid within 5 months after acceptance, and 20% down payment is required upon submission; and 2. A Periodic Payment offer is paid within 24 months. Installment payments must start with the submission of the offer, but do not have to be equal. In other words, you can pay minimal amounts for 23 months and make the remaining balloon payment on the 24th month. Offer review takes between 4-18 months, depending on the amount owed National Association of Consumer Bankruptcy Attorneys