LAST week, we established the fact that back due income taxes can be discharged in bankruptcy, despite the popular belief that this was not possible. We said that there are six rules that must be complied with to discharge taxes. All of these rules must be followed. If you comply only with five rules, the back taxes are not discharged. The six rules are: the three year rule which requires that three years have passed since the tax return was due, the two year rule which requires that two years have passed since the tax return was filed, the 240-day rule which requires that 240 days have passed since the taxes were assessed, the fraudulent return rule which requires that the return did not involve any fraud, the willful evasion rule which requires that there was no willful attempt to evade or defeat the tax, and finally the withholding tax rule which requires that the tax did not arise from a duty to withhold.
It used to be that discharging income taxes in Chapter 13 was different from Chapter 7. Chapter 13 used to have a “super discharge” which allowed the discharge of withholding taxes and income taxes despite the total failure to file a return, filing a fraudulent return or willful attempts to evade or defeat the tax. However, the new bankruptcy code which took effect in 2005 has made the discharge of taxes identical under either Chapter 7 or 13. There is no longer a “super discharge” of back due income taxes under Chapter 13. For example, if you are one of those who believe that the Federal government does not have the power to tax so that you willfully evade income taxes, you will not be able to discharge your back due income taxes in bankruptcy because you cannot comply with the willful evasion rule. Wesley Snipes found out about this rule the hard way. He owed $12 million in back taxes because he failed to file tax returns for several years believing that the Federal government did not have the authority to tax him. He was convicted of willful tax evasion. I tried to help Mr. Snipes by selling him a birth certificate which would show him as a member of the Native American tribe in Pechanga. That way he would not be subject to Federal tax as long as he moved into the confines of the reservation and he would receive hundreds of thousands of dollars of dividends yearly until he died as his share of the casino profits. But he declined my offer saying “I can’t live in no teepee for the rest of my life!”
The 240-day rule states that income taxes are a priority claim for a period of 240 days after taxes are assessed. A notice of deficiency is not an assessment. So, if the IRS sends you a notice saying that you owe them $10,000 which they call a notice of deficiency; that is not an assessment. The bankruptcy code does not define the word “assess”. This is because the IRS and as well as all the states have different methods of assessing taxes. The federal income tax cases which have interpreted the word refer to Section 6203 of the Internal Revenue Code: “assessment shall be made by recording the liability of the taxpayer in the office of the Secretary in accordance with rules or regulations prescribed by the secretary.” The regulations provide that assessment is made “by an assessment officer signing the summary record of assessment.” So, the decision of a tax court is not the date of assessment.
The IRS has a three-year statute of limitation within which to assess after a return is filed. But the IRS cannot begin the collection process until after it has assessed. Just to be sure, get a copy of the record of assessment from the IRS. You can use Form 4506-T then request for both the return and the “account transcript” to obtain the record of assessment.
* * *
Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.