As of right now, there is not a lot of data. But, at Simpson Field (Alexandria), where i coached many a little league team and where my children enjoyed playing, at least 50 shots have injured (and perhaps killed) aides and elected officials practicing for a Charity Congressional baseball game. Please pray for all injured and let’s get rid of these guns that so easily devastate our lives- and, now, even our dysfunctional government.
Ok. I know it’s the start of the Summer. And, most of you have barely recovered from the Ides of April. But, I’m still going to talk about taxes.
No, I’m really going to talk about folks who are in a heap of trouble with their taxes. Who think they can file for bankruptcy and walk away from their IRS inquisitors.
Except it’s not as easy as 1,2, 3. Instead, the solution adheres to 3,2, 240.
What, you say?
The bankruptcy code stipulates that you can only discharge stale tax debts in bankruptcy. That means the court can only discharge income taxes one owes that came due three years before filing for bankruptcy. [Section 507(a)(8)(A)(i)] Assuming you filed your taxes on time (more on this below), that means the only taxes that can be discharged under this portion of the rule are at least 3.3 years old. (April 15 is roughly 1/3 of the way into the current year.)
Moreover, at least two years must have elapsed since the taxpayer filed the tax returns. [This is covered by Section 523(a)(1)(b)ii)].
Oh- and any tax bill that has arisen must be at least 240 days old. This last part covers amended tax returns, or unpaid taxes that have been developed via an audit or correction by the IRS. [This portion is covered via Section 507(a)(8)(A)(ii).
Except, there’s yet another wrinkle.
OK. It’s not a wrinkle. It’s a chasm.
Because too many folks who have large tax debts are the same folks who never filed their taxes on time. And, that usually means they also didn’t file for an extension, either.
This has been made clear by two recent court decisions. One from the Third Circuit (re Giacchi, No 15-3761, 5 May 2017) and the other case was decided the Northern District of California (re Van Arsdale, No 14-04035, 18 May 2017; please note that as of right now, the full decision is not published).
In Giacchi v. the IRS, the court decision revolved about the timeliness of the tax returns. In particular, late filed Form 1040’s did not meet the US Code (11 USC Section 523(a)(1)(B)), employing what is termed the Beard Test for tax returns.
The Beard Test, per the IRS memorandum, stipulates the four necessary elements for a “proper” tax return.
“(1) it must purport to be a return, (2) it must be executed under penalty of perjury, (3) it must contain sufficient data to allow calculation of tax, and (4) it must represent an honest and reasonable attempt to satisfy the requirements of the tax law.”
This means that filing a tax return after the IRS has already assessed the taxpayer will not qualify that submission as an honest or reasonable attempt to meet the definition of a legally and timely filed tax return.
And, that’s a real problem. Because, as we have found with many (new) desperate clients, they hadn’t filed their tax returns and now want us to drop everything to file them yesterday, because the IRS has caught up to them.
Now, admittedly, with the proper documentation, we can probably determine the properly required taxes. However, if the taxpayer can’t or doesn’t pay them- these debts are never dischargeable under bankruptcy, despite how many years have passed before bankruptcy is filed.
(Yes, the Third Circuit clearly mentioned that having the IRS abate in part the tax assessment they had imposed before the taxpayer filed for bankruptcy, the taxpayer “cannot now seek to benefit from the IRS’s imprecise estimate” and attempt to discharge said debt in bankruptcy.)
The second case, Van Arsdale v. IRS, involved an SFR (substitute filed return), which is what the IRS sends taxpayers who have been recalcitrant to file their tax returns. (This is a deliberately {the IRS denies this, but any sentient being recognizes that the IRS is attempting to scare the taxpayer into filing] high tax demand the IRS sends taxpayers who are more than a few months late filing their required tax return.)
The IRS position, that filing a tax return AFTER an SFR had been prepared by the IRS, is not an honest or reasonable attempt to address one’s tax obligation was upheld by the court.
So, we stand by our incessant advice for all of you:
- File your tax returns by your due date.
- If you can’t file your return, file a timely extension request. (Unless you are a repeat offender who has not filed several returns, these requests are automatically accepted). Filing an extension does not remove any potential penalties for underpayment (that means ZERO obligations to the IRS after the required filing date).
- If you can’t pay the full amount of taxes due, submit a timely request for payment plans. Payment plans- for those who have been compliant with the law in the past- are automatically accepted if the total amount of taxes due is $ 50,000 or less.
- If you do none of the above, be prepared for an IRS response, which can include suspending your passport (the State Department is required to act upon such requests immediately), the inability to discharge any old tax debts in bankruptcy, and/or potential incarceration.
File and pay your taxes. It’s the law.
