Consumer Bankruptcy Journal Spring 2017 - Page 15

NAVIGATING THE LATE TAX RETURN PROBLEM

dischargeability of the tax ?
In most non-McCoy cases , the distinction is important .
a . If filed late but before the assessment , the weight of authority is that it is a valid tax return and the IRS typically acquiesces to the validity of the return . 10 The argument arises if the return was filed after the assessment .
b . If filed after the assessment , then the Beard rule 11 applies - applying the Beard test , did the circumstances “ represent an honest and reasonable attempt to satisfy the requirements of the tax law ?”
i . If it satisfies Beard , it will probably be deemed a valid return . 12 Skip to question # 5 .
ii . If not , then the return is invalid and the tax is not dischargeable . 13
Whether the circumstances of a postassessment filing rise to the level of “ honest and reasonable attempt ” is quite subjective , and , typically , counsel will not be able to assure the client of a favorable outcome .
The facts and circumstances that the debtor could argue to support his or her “ honest attempt ” are probably infinite , and the author has found no case that summarizes what these might be . Some of the circumstances considered for or against a finding of honest attempt include the taxpayers hiring an accountant to prepare the returns , the honesty and completeness of the returns , the length of delay after the assessment for filing the return (“ extraordinary tardiness ,” Johnson v . U . S . ( Bankr . S . D . Fla . 2016 )), the debtor ’ s unemployment , disability , or illness , the debtor ’ s drug addiction resulting in incapacity , post-office error , and failure to inform the IRS of a change of address .
5 . Two years ago . If it satisfies the Beard test , was it filed more than 2 years ago ? 14
a . Yes
b . If not , it will not satisfy the 2-year rule until the filing date is over 2 years back ( or later if subject to tolling ; see remarks below ).
6 . Tolling . If the return was filed more than two calendar years ago , was the 2-year period from the date the return was filed tolled or suspended by a prior bankruptcy , an IRS Collection Due Process appeal , or an offer-incompromise that prevented the taxing entity collection activities ( primarily , levy )? In such event the 2-year period may be suspended for the time the event prohibits collection , plus an additional 90 days . 15
The Bankruptcy Code includes tolling events that apply only to the 3-year and the 240-day periods ( see hanging paragraph attached to 11 U . S . C . § 507 ( a )( 1 )( G )), but does not include tolling of the 2-year period . However , there have been several cases that have imposed tolling of the 2-year period on the theory of equitable tolling . 16 With so few cases addressing the issue it is very difficult to predict how it will be handled by IRS insolvency .
7 . Fraud ? If the 2-year period is satisfied , was the return fraudulent or the taxpayer guilty of attempted tax evasion ? 17 In the author ’ s experience the IRS typically tosses a suspected fraudulent return into the category of tax evasion . Tax evasion or attempted tax evasion has been rare in the author ’ s experience .
In meetings with one client , the author was satisfied that the taxes met all the rules for discharge . The client left with a big smile . A few minutes later he came back , looking a bit sheepish and accompanied by his wife who had been out in the hall . She said there was something her husband wanted to tell me . She looked sternly at him . He said there was something I might want to know ; he had punched an IRS officer in the face , and then filed two fake liens against him . Would that make any difference , he asked . This called for another , longer , conference with the client .
Conclusion
In cases that look as though they may involve some of these questions , the author suggests you use a checklist based on the sequence shown here . You may want to use one of the online transcript analysis sources such as Pitbull ’ s transcript service . Better yet , consult with the author . 18
( Endnotes )
1 One can get up to speed on these rules by getting the author ’ s book , Discharging Taxes in Consumer Bankruptcy Cases , at KingLawPublishing . com ( aka BankruptcyBooks . com ). 2 11 U . S . C . § 507 ( a )( 8 )( A )( i ) and ( ii ), and ( a )( 8 )( G ). 3 11 U . S . C . § 523 ( a )( 1 )( B )( ii ). 4 For those who are into reading IRS Account Transcripts to identity important dates , note that the entry appearing on the transcript with code “ 150 ,” the words , “ Tax return filed and tax assessed and a date ” is not the date the tax return was filed ; the actual filing date appears just above code 150 , “ Return due date or return received date , whichever is later .” This is the date either the taxpayer ’ s 1040 , or the IRS Substitute for Return was filed . 5 In re Ciotti , Case No . 07- 13229-JS ( Bankr . Md . 9 / 11 / 2009 ) ( Bankr . Md ., 2009 ) (“ The “ report of federal adjustment ” required by
National Association of Consumer Bankruptcy Attorneys Spring 2017 CONSUMER BANKRUPTCY JOURNAL 15