Stephan J Dunn for Forbes writes: Often I express the view that bankruptcy rarely if ever is an
effective means of dealing with tax collection action. Some readers
have challenged me on it, and I have promised elaboration. Here it is,
in the form of an excerpt from my forthcoming West treatise Current Federal Tax Controversies:
“Bankruptcy is almost never an effective means of relief from a tax
liability. Once a tax lien attaches to property, it remains until the
assessment is paid or becomes unenforceable by the lapse of time,
notwithstanding discharge of the property’s owner in bankruptcy
There is no discharge for a tax with respect to which a return was
not filed, or was filed after the due date, and within two years before
the filing of the bankruptcy petition. Nor is there discharge for a tax
with respect to which the debtor made a fraudulent return or willfully
attempted in any manner to evade or defeat such tax. There is no
discharge for income tax for a taxable year ended on or before the date
of filing of the bankruptcy petition, for which a return, if required,
was last due, including extensions, after three years before the filing
of the bankruptcy petition.
There is no discharge for a tax required to be collected or withheld
and for which the taxpayer is liable in whatever capacity. These are
the so-called “trust fund” taxes—income tax, Social Security
tax, and Medicare tax withheld by an entity from employees’ wages, but
not paid over to the taxing authorities. These taxes are assessable
against the entity’s responsible persons, and they are not dischargeable
in bankruptcy.
The statute of limitations on assessment of tax against a taxpayer or
collection of it is suspended during any period when the IRS is
prohibited from assessing the tax or collecting it because of the
pendency of a bankruptcy case concerning the taxpayer, and—
(1) for assessment, 60 days thereafter, and
(2) for collection, six months thereafter.
Perhaps the most harmful aspect of a bankruptcy is that it subjects
the taxpayer to the scrutiny of creditors and the bankruptcy trustee.
In one case, a taxpayer’s Federal income tax accounts were reposing as
currently not collectible. Then the taxpayer filed a chapter 7
bankruptcy. The bankruptcy was ill-advised, discharging but a few
thousand dollars in credit card debts. The bankruptcy prompted the IRS
renew collection action against the taxpayers. The Revenue Officer
assigned to the taxpayer’s accounts had retired. A new Revenue Officer
investigated and found a recorded deed which the taxpayer had executed
before filing the bankruptcy. The IRS asserted a nominee lien against
the property conveyed by the deed. The grantee sued the United States
under 28 U.S.C. § 2410 to remove the cloud of the recorded NFTL from the
property, and the U.S. District Court ultimately upheld the nominee
lien.
Installment agreement, currently not collectible posting, and offer
in compromise, discussed above, are all more effective than bankruptcy
in dealing with tax collection action, and do not involve the risks
inherent in bankruptcy.”
Footnotes with legal authorities have been omitted from the foregoing excerpt. For a version with legal citations, check here.
Saturday, November 2, 2013
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