Source: http://www.bankruptcynewyork.com/bankruptcy/solutions-for-the-bankrupt-taxpayer/
Timestamp: 2019-04-20 20:10:43+00:00

Document:
a. Tax Return Filed. When a tax return is filed showing a tax due, the IRS assesses that tax. [IRS §6201(a)].
3) A Notice of Deficiency is then sent to the taxpayer’s last known address [§6212]. The taxpayer can either pay the tax and file a claim for refund to the District Court or file a petition to the Tax Court. If nothing is done within 90 days, the tax is ASSSESSED.
c. Assessment can now be made after Bankruptcy is filed. Before the 1994 Bankruptcy Reform Act, this was not the case.
1. the tax shown thereon is paid within 10 days, then no additional interest will be charged. This notice is the one statutorily required for the creation of a valid Federal Tax Lien.
2. small individual income tax liabilities, the taxpayer will normally receive four subsequent notices before the IRS proceeds to take any administrative collection measures.
3. If the liability is not paid after the initial notice, then the taxpayer will receive a second notice, Notice 501, titled “Reminder of Balance Due”, five weeks subsequent to the issuance of the first notice.
4. Thereafter the taxpayer will receive Notice 502, “Overdue Tax,” five weeks after the issuance of Notice 501. Then the IRS will issue Notice 503, “Urgent Payment Required”, five weeks after Notice 502.
b) Finally, the taxpayer will receive via certified mail Notice 504, “Notice of Intention of Levy,” five weeks after issuance of Notice 503 if payment is not made after Notice 503. Notice 504 statutorily gives the Internal Revenue Service the right to initiate collection enforcement measures against the taxpayer 30 days subsequent to the date of the notice. Therefore, on smaller balance accounts, the total time form first notice to enforcement action is 25 weeks. For a business taxpayer, the total time is 15 weeks.
c) Early Intervention Program (Large Individual cases/Businesses) For large individual debt (over $10,000), the IRS will omit notices 501 & 502 and instead, will generate notice 503 normally 5 weeks after the initial request for payment. Notice 504 will be generated 5 weeks after Notice 503.
For business taxpayers, the IRS will send out 2 notices over a 5 week period prior to initiating collection.
1. IRC §6323 – Lien Priority – The Federal Tax Lien (FTL), is NOT valid against purchasers, holders of a security interest, mechanic’s lienors, and judgment lien creditors until a notice of lien has been filed. The tax lien becomes valid against these persons upon filing of notice of lien.
2. IRC §6325 – Discharge of Lien – The IRS must release the tax lien not later than 30 days after it is paid or becomes legally unenforceable. The IRS may also release the lien if it accepts a bond or other collateral from the taxpayer. If the lien has been satisfied or has become unenforceable, a taxpayer should submit a Notice of Failure to Release Lien to the IRS SPF, lien section. If the IRS does not properly release the lien, a lawsuit may be initiated under IRC §7432.
b. Taxpayer Assistance Orders – A taxpayer had the right to apply for assistance if she or he is suffering or is about to suffer significant hardship as a result of the manner in which Internal Revenue laws are administered (IRC § 7811). Thus, taxpayers have the statutory right to appeal unreasonable decisions by collection officers. This is accomplished by requesting a Taxpayer Assistance Order10, which may require collection personnel to release property levied upon or to cease any action or refrain from any action with respect to the taxpayers (IRC §7811(b)).
4) The IRS may alter or modify or terminate the agreement if: (a) The taxpayer fails to provide accurate or complete financial information when requested; (b) The taxpayer’s financial condition improves; (c) Collection of the tax is in jeopardy; (d) The taxpayer fails to pay any of the installment when due; or (e) The taxpayer fails to file or pay any other federal liability.
b. Request copy’s of any tax returns if not available. The IRS has files extending back indefinitely and almost anything can be accessed.
c. The Freedom of Information Act (FOIA) makes all information available to your for use in assisting your client. IRC §6110 provides for public disclosure of all IRS written determinations. The IRS must respond to FOIA requests within 10 working days of receipt. If the request in denied, in whole or in part, an appeal may be made in writing, within 35 days of the denial.
ii. Tests of eighth priority nondischargeability consider the age of the tax liability as a factor. These dischargeability tests are “the three year rule” and “the 240 day rule”.
iii. Income and gross receipts taxes: the three year rule: there is an eighth priority for prepetition income and gross receipts taxes that were due within the three year period before the petition date. The due date of the return, including any extensions, the key factor in application of rule: if there was an extension of time to file, that becomes the due date.
iv. EXAMPLE. Assume petition date is January 1, 1990. The date three years prior to that date would be January 1, 1987. All tax liabilities for the taxable years for which the due date of the tax return, including extensions, was before January 1, 1987, are nonpriority, general unsecured claims, and are dischargeable. The 1986 tax year’s liability due on April 15, 1987 would be classified as an eighth priority tax liability because its due date was within the three year period before the petition date.
v. 240 day rule: where the bankruptcy petition is filed within 240 days of the assessment of the tax, or where the debtor submitted an offer in compromise within 240 days of the assessment, plus the period during which the offer in compromise was pending plus 30 days, the taxes are excepted from discharge.
vi. Multiple Assessments. Where there are multiple assessments for a taxable year’s original and deficiency assessments, the date of the later deficiency assessment is the date from which the 240 day rule must be calculated.
vii. Offers in Compromise. The 240 day assessment period is suspended and thereby extended during the pendency of any prior Bankruptcy cases filed by the debtor. The 240 day period is also extended for any period (1) during which an offer in compromise is pending and for 30 days thereafter, or (2) during which a waiver of the statute of limitations on assessment is in effect. An offer in compromise can, however, be filed after the 240 day period has expired without affecting the priority classification or dischargeability of a tax liability. The filing of an offer in compromise before a tax is assessed does not toll the running of the 240 day period.
ix. Review of Discharging Income Taxes. For bankruptcy law purposes, federal income taxes fall into two categories–secured (NFTL) and unsecured (no NFTL). Unsecured federal income taxes can be discharged only if four conditions are true: (1) you neither filed a fraudulent return nor attempted to evade paying taxes; (2) the liability is for a tax return actually filed at least two years before you file for bankruptcy (the two year rule); (3) the tax return was due at least three years ago, including any time for extensions (the three year rule); (4) the taxes were assessed at least 240 days before bankruptcy filing (the 240 day rule). Certain actions extend the above time limits: (1) if you filed any bankruptcy in the past, the time the case was pending plus an additional six months is added to all three time requirements; (2) if you made an Offer in Compromise, the time your offer was pending plus an additional 30 days is added to the 240 day requirement; (3) if you requested a Taxpayer Assistance Order, the time your request was pending is added to all three time requirements.
x. Certain property taxes. Any property taxes payable without penalty within one year before the petition date are eighth priority unsecured tax claims. There is a limitation, in that the property tax must have been assessed within one year before the petition date.
xi. Trust Fund Tax Liabilities. This category includes the employee’s withholding tax and the employee’s social security. Trust fund tax liabilities asserted against an individual taxpayer are granted an eighth priority and are nondischargeable [ie the employee’s portion of an employment tax liability is therefore nondischargeable no matter how old the liability is]. This includes the liability of a responsible officer under the Internal Revenue Code as well as any state statutes that may impose a trust fund liability when that officer is the debtor. Important to identify any trust fund tax liabilities because of the unlimited time period during which those liabilities retain their priority and therefore nondischargeable status.
xii. The 100% Penalty. A person found liable as the “responsible person” for the 100% penalty cannot discharge the liability by filing bankruptcy under chapters 7, 11, or 13. The liability for trust fund taxes is entitled to an eighth priority. But Note that this priority status does not depend upon when the employment tax returns were due or filed, when the bankruptcy petition was filed, or when the 100% penalty was assessed against the responsible person. Thus a responsible person cannot file bankruptcy for relief from payment of the 100% penalty. At most, the automatic stay would immediately restrain the IRS from collection efforts. In chapter 13, if the debtor lists the 100% penalty, and the IRS neglects to file a claim, then the claim need not be paid and upon completion of the plan the tax (100% penalty) is discharged.
c. Other Dischargeability Rules: Section 523 Rules/ 2 year rule and fraud or evasion/ Fraudulent, Unfiled or Late Returns.
ii. EXAMPLE. Assume that a taxpayer files his delinquent 1985 return on January 1, 1991, and that the tax liability reflected thereon is assessed on February 1, 1991. Even though the 1985 tax liability may appear to be a nonpriority, dischargeable tax liability, it is in fact a nondischargeable tax liability if the petition was filed before January 1, 1993, two years from the date the tax return was filed with the IRS or state taxing authority. An individual’s tax liability may therefore not have an eighth priority status under the three year and 240 day tests, but it may still be nondischargeable because it was not timely filed.
iii. Fraudulent Tax Returns. If a taxpayer files a fraudulent return, the tax liability attributable to that return will not be discharged, and will also not be granted any priority treatment in the scheme of distribution of assets from the estate. Whether or not a tax return is fraudulent is a question of fact.
c. Tax Liens in General. A tax lien in favor of the United States arises by operation of law if a person is unable to pay a tax liability after demand is made for payment. The general tax lien if IRC Section 6321 is referred to as a “secret lien” because it arises as a matter of law against the taxpayer without the necessity of filing a Notice of Federal Tax Lien. The lien attaches to “all property and rights to property, whether real or personal, belonging to such person”, even if not seizable by IRS due to applicable exemptions from levy for certain property in IRC Section 6334. The “secret lien” is perfected without the filing of the Notice of Federal Tax Lien, but only as against the taxpayer. A Notice of Federal Tax Lien must be recorded before a tax lien will be effective against certain third parties. Tax liens arising from separate tax assessments than those asserted in a prior tax lien will not “relate back” to the first tax lien’s filing date. Thus each tax lien must stand on its own merits unless it is an actual amendment of a previously filed lien.
I. Notice of Federal Tax Lien. When a bankruptcy petition is filed, the presence or absence of a recorded Notice of Federal Tax Lien controls how the IRS’s claim is treated. If a NFTL is recorded, the IRS will be a secured creditor and the unsecured priority claim rules of section 507(a)(8) will be inapplicable to that secured claim. If, however, a NFTL is not recorded before the petition date, the IRS’s claims will be unsecured, governed by the priority and dischargeability rules of section 507(a)(8). The “secret Lien” against a debtor will be discharged if the underlying tax liability is a nonpriority dischargeable tax liability. The “secret lien” will not be discharged if the underlying tax liability is nondischargeable.
h. Suprerpriorities. There are some Superpriorities that the Tax Lien is subordinate to, even if filed first.16 The federal lien will also trump most state tax liens since it is perfected upon filing, whereas state liens are perfected normally upon execution.
i. Attacking the lien. The lien can be attacked by proving that notice was not sent within 60 days of the assessment. The IRS can refresh the 10 year collection period by going to District Court to secure a judgment. The homestead exemption does not defeat this lien.17 The lien survives bankruptcy, but the taxpayer can bring a Bankruptcy Code section 506 action to declare the lien valueless if there is no equity in the property.
SCENARIO – Debtor is a bank VP of “Rich investors, “USA” and commits a crime by embezzling money from his Bank. This is uncovered by the authorities and Debtor is prosecuted. Attorney general reports the case to NYS Department of taxation and Finance. They send a deficiency notice to taxpayers who ignores the notice. NYS Assesses the taxpayers for $100,000. The Tax year in issue was 1991. The assessment was on 7/31/98. Additionally, NYS places a lien on the house. The house is worth $350,000. The Debtor has a 1st mortgage of $250,000, a 2ND of $50,000 and a $40,000 judicial lien. Debtor is married and the house is owned Tenancy by the Entirety. Debtor filed a prior Chapter 7 on 8/31/98 for credit card debt and received a discharge on 12/15/98. What advice do we have for Debtor?
SCENARIO– same fact pattern, except the assessment is for $375,000. What advice for this Debtor?
SCENARIO– same fact pattern, except Debtor voluntarily files an amended return on 1/1/98. What advice for this Debtor?
SCENARIO– same fact pattern, except Debtor never filed the 1991 return and NYS does not assess, but instead, makes a return for the Debtor and collects against this. What advice?
SCENARIO– same fact pattern, except Debtor on 10/31/98 files an Offer In Compromise with NYS. This offer was rejected on 12/31/98? Any difference if instead, Debtor enters into an installment agreement but has now defaulted on such agreement?
– All debt provided for in 11 USC § 523(a)(5) such as alimony, maintenance or support to former spouse and child. – Student loans (used to be an exception for 7 year old loans, but 1998 act eliminated that).
– Death or personal injury claims resulting from operation of a motor vehicle while intoxicated.
b. 240 day assessment rule- Where the bankruptcy petition is filed within 240 days of the day of assessment of the tax, or, where the debtor submitted an offer-in-compromise within 240 days of the assessment, plus the period during which the offer-in-compromise was pending plus 30 days, the taxes are exepted from discharge (§ 507(a)(8)(A)(ii)). Note that submitting an Offer in Compromise tolls the 240 day period19 for the period that the offer was pending, plus 30 days.20 If the taxing authority makes multiple assessments, the most recent assessment is the one that should be considered.
c. Other Priorities- These include property taxes assessed within 1 year, fiduciary taxes and excise taxes.
Debtors can use the priority rules to their advantage as the debtors have control over when the bankruptcy petition is filed, so that where possible, the bankruptcy petition should be filed more than three years from the due date of the tax return, and more than 240 days from the date of assessment. If the taxes have not yet been assessed, it is generally possible to expedite the case within the IRS system and cause an assessment to be made, and thereafter wait out the 240-day period. Obviously, debtors should be advised to refrain from submitting an offer-in-compromise during the 240 days after assessment. Instead, the debtor should consider entering into an installment agreement with the Service, which does not in any way prohibit the debtor from later filing bankruptcy.
Chapter 13 forces the IRS to enter into an installment agreement with the taxpayer.
Tax penalties stop accruing the day you file for Chapter 13.
Penalties on your tax debts are treated like any unsecured debt, such as credit cards.
If the IRS has not filed a Notice of Federal Tax lien, interest stops accruing. If the IRS has filed a NFTL, interest accrues only on the amount of your tax debt equal to the value of your property. EXAMPLE: J owns property worth $30,000 and owes the IRS $90,000. The IRS has a NFTL. In J’s chapter 13 case, interest accrues only on the $30,000 secured portion of the tax debt.
Each creditor must file a proof of claim by a certain date. If a creditor, even the IRS is tardy, it loses the right to make a claim on the debt in bankruptcy, and is barred forever from collecting outside bankruptcy. But you must complete all payments under the chapter 13 plan. If you don’t, the tax debt will reappear, with interest and penalties added on for the time you were in bankruptcy. CAVEAT: exception for secured taxes: if the IRS recorded a NFTL, the amount of the tax debt secured by your property survives bankruptcy, whether or not the IRS files a claim.
Filing under chapter 13, or any other type of bankruptcy, stops the IRS cold from taking drastic collection action such as seizure of your assets.
A debtor’s plan must provide for the full payment, in deferred cash payments, of all tax claims entitled to priority under section 507(a)(8) unless the IRS agrees to different treatment. Interest accruing on a tax liability after the effective date of the plan is not payable to the IRS in a chapter 13 case.
3) What is a Return?
Internal Revenue Code rules define a return as having to be: – On the Proper form. – Provide sufficient income and deduction data. – Be signed by the taxpayer. A return prepared by the IRS under IRC §6020(b) is not a return for discharge under Chapter 7, but can be discharged in Chapter 13 by following the 240 days rule.
Mr. Smith is the President of ” XYG Internet Co.”. He owns 25% of the stock. The company has not paid any of its 1997 trust fund taxes due to a cash flow problem incurred with its rapid expansion. Alice Jones is the Treasurer of the company. She signs all tax returns and sometimes signs checks. Dawn Jones is the VP of the company. She owns 75% of the stock which was originally supposed to be a silent investment. Lately, she has become more active in negotiating workouts and other contract matters, given that she is an Attorney.
IRS has sent collecting notices totaling $70,000 at present, including interest and penalties. They have also assessed within the shortest period allowable and has most recently placed a lien on the property.
On 6/30/98 IRS placed liens on the premises and property and on 12/1/98 IRS sent Intent to Levy and Levy notice to Banks. IRS, in addition, has called in all 3 officers for an interview to determine “responsible party tax liabilities”.
Can the Corporation designate payments? The answer is yes, if the payment is voluntary, and the designation is in writing, including Bankruptcy plans.
If the IRS seizes money within the preference period can it be deemed a preference? Most cases, hold it is not a preference.
Bankruptcy plans fully pay taxes within 6 years. Is interest required?
If Chapter 11 fails, what are the personal Bankruptcy options for the officers?
1) IRS most give written notice no later then 5 days after filing a notice of lien. The taxpayer then has a 30 day period to request a hearing with the IRS appeals.
2) IRS must provide written notice of an intent to levy at least 30 days before the action. The taxpayer has a 30 day period to request an Appeals hearing.

References: §6201
 §6323
 §6325
 §7432
 § 7811
 §7811
 §6110

v. 
 § 523
 §6020