TOLLING EVENTS IN TAX DISCHARGE
By Morgan D. King, Esq.
Morgan King Company &
Morgan King Law Offices
Dublin, California
A
ssuming you have at least an
acquaintance with the 5 rules
that must all be satisfied in order
to discharge income taxes1, here are
some issues to watch for.
Discharge of taxes and interest2 on
the taxes is governed by, among other
things, three “temporal” conditions. The
first two rules addressed here are the
3-year and the 240-day rules, to wit; the
most recent due date for the taxpayer
to file his or her tax return must be over
3 years before the bankruptcy is filed;3
And, the tax assessment must have
occurred over 240 days prior to the
bankruptcy.4
The Bankruptcy Code at 11 U.S.C.
§ 507(a)(8)(G)5 provides that certain
events that are typically under the
control of the taxpayer may stop the
clock on (or “suspend” or “toll”) either
or both of these periods. If a client has
done any of the tolling events while one
or both of the time periods are pending,
the respective time period is extended
for the time the tolling event is pending6,
plus an additional 90 days.7
Prior bankruptcy or IRS Collection
Due Process Appeal
40
CONSUMER BANKRUPTCY JOURNAL
Tolling events specified in the
Bankruptcy Code include a prior
bankruptcy, and a prior IRS Collection
Due Process Appeal (“CDP”). A literal
reading of the Code provides that a
bankruptcy or an IRS Collection Due
Process Appeal or any other event
“… during which a governmental
unit is prohibited under applicable
nonbankruptcy law from collecting
at tax as a result of a request by the
debtor for a hearing and an appeal of
any collecting action taken or proposed
…”
Hence a bankruptcy filed less than
3 years from the due date makes the
taxes nondischargeable.8 Note that
technically it is not a prior bankruptcy
per se that tolls either of the time
periods, but only the time collection is
prohibited, i.e., the time the stay is in
effect. For example, in the case of a
prior bankruptcy for a one-time serial
filer, tolling will expire in 30 days without
a court order extending the stay, and in
the case of a 2-time serial filer, tolling
does not commence at all unless the
court orders the stay to be in effect.9
The IRS Collection Due Process
Appeal procedure provides that if a
taxpayer receives a final notice of intent
to levy, he/she has 30 days in which to
Winter 2016
appeal the pending levy;10 the appeal is
a request for a hearing and an appeal
and hence halts collection while the
appeal is being processed.11 Be alert
that what may be overlooked in some
cases dealing with a state income tax
that may have something equivalent to
an IRS CDP.
IRS Offer-in-Compromise
A 3rd tolling event prescribed by the
Code is an offer-in-compromise12 that
is filed while the 240-day assessment
period is pending; this event adds the
time the offer is pending plus 30 days.13
This is true only as long as the IRS is
considering whether to accept or reject
the offer, because while the making of
any offer halts levies, ordinarily an OIC
by itself is not a request for a hearing
and an appeal; 14 however, if the OIC
is rejected and the taxpayer appeals
the rejection, then tolling would occur
because, unlike the mere making of
the offer, an appeal is a request for
a hearing and an appeal and levy is
prohibited while the appeal is pending.15
Collection prohibited by confirmed
plan
The Code also provides that where
collection is prohibited by a confirmed
plan, tolling may happen in the same
National Association of Consumer Bankruptcy Attorneys