Income Taxes and Bankruptcy

This is how I like to bankrupt income taxes. You can litigate a tax assessment, make a payment agreement as low as zero per month or bankrupt an income tax. I am a former tax prosecutor and these are items your attorney or that you may miss if you are attempting to bankrupt your income tax debts. If you want to bankrupt income taxes you have to analyze your tax transcript. Just getting the tax transcript can be hard. Our office would need a special IRS form giving us a power of attorney authority to get your tax transcript.

Most bankruptcy attorney analyze the 3 major rules that the tax must have been due for 3 or more years, that you filed the return within 2 years of filing bankruptcy and there has been no assessment within 240 days of filing. However, there are at least 13 more items you must make sure of and another five which will effect how much you can get back.

Essentially the tax payer has to wait 3 years after the tax became due. If April 15th fell on a weekend or holiday you need to wait a few extra days because this is 4 business years in time. You also have to timely file your taxes and must have filed the tax return over 2 years before you filed the bankruptcy. If you asked for an extension until October 15th this is three years after this date. There must also be no fraud involved in your tax account or attempt to evade. If the IRS has filed a substitute for your return because you failed to timely file you may never be able file and discharge your taxes.

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The Quick Checklist of IRS Codes

1. The IRS codes for Tax fraud or evasion are generally IRS Codes 910, 911 and 915.  These are Masterfile codes which are cross referenced in most of your internal files and documents letting the IRS staff know you have a history of fraud. You will not qualify for discharging your income taxes in bankruptcy if these codes appear but list the IRS debt anyway if you are filing bankruptcy.  The IRS is notified to file their claims whenever someone files a bankruptcy case. The account will be sent to an office in Pennsylvania which handles IRS claims in bankruptcy.  Tax departments are human and they make mistakes and may treat it as discharged anyway or may give you more favorable repayment terms after discharge.

2. Extension periods which increase your waiting period to discharge income taxes.  Codes which will extend the waiting periods include the codes for filing a bankruptcy during these three years and filing an offer in compromise code 480, 481 and 482.  Filing a bankruptcy tolls (extends) the period the time of the bankruptcy plus 90 days.  Submitting an offer in compromise tolls (extends) your 240 day assessment waiting period the time the offer is under submission plus 30 days.

3. TXMOD and TXMODA transcripts.  The most detailed transcript is the TXMOD or TXMODA.  If you get the detailed transcript it will include extra codes which effect how long you must wait and how completely you can discharge these taxes. Most events extend waiting periods the time of the event plus 30 or 90 days.

  • Code 150 Tax Return Filed incorrectly. If the return was not signed it was not filed.  Your signed returns are filed under penalty of perjury. Fraudulent returns can be prosecuted.  Essentially a filed return is your agreement that the reported amount is at least the tax which is owed.  If the return is not properly filed the waiting periods for bankruptcy or the csed date which is essentially a 10 year statute of limitations for collections never runs.  The Csed date runs from the date of assessment which is when the tax return is filed.   Blank amounts on the returns will also trigger a Code 150 problem.  The cure is to file the return properly signed with amounts entered.  Until you properly refile the return the csed dates will not run. If the IRS files a return for you (substitute for return), they will leave out the deductions and the csed date never runs and you probably lose the ability to file bankruptcy and discharge your tax debt.
  • Code 320 Evidence of tax fraud or evasion.  Forget any guarantee of discharging your taxes in bankruptcy if you have this code.  Eventually the debt may not longer be collected by the IRS but you cannot discharge the debt by bankruptcy. There is a case where one IRS agent was simply told to come back later by a mother with a newborn.  The agent claimed that the act was a willfull evasion and the mother was disallowed discharging the tax in bankruptcy.  Normally the department will not object to discharge based on fraud but instead on evasion which is an easier standard for them to allege.
  • Code 431. Abatement of tax by IRS.  An important item to look for.  The Department can reduce or eliminate your tax if it feels the taxpayer has a basis such as high health costs or disability which make collection doubtful or liability for the tax doubtful.
  • Code 420. Audit started. Audits generally toll the waiting period. About one person in 100 people are audited.  As income increases your chance of an audit increases.  Certain deductions will also increase the chances of an audit such as home office expenses.  The audit ended is noted in the record by “Code 421 audit ends”.
  • Code 249. Penalty assessed.  Just because a penalty was assessed does not extend the waiting period to file a bankruptcy something must normally happen to delay their ability to collect like a bankruptcy to toll a statute of limitations or add time to a tolling period.
  • Code 290 or 300. Additional tax assessed.  The assessment of an additional tax is one of those things which will add to the time you must wait to file bankruptcy and discharge a tax debt. There must be no additional tax assessed within 240 days before you file a bankruptcy or you will at least owe the additional tax.
  • Code 460. Extension to file the return.   Asking for additional time adds to the time you must wait to file a bankruptcy and discharge the tax debt.  You must allow the tax department three years to collect before you can file the bankruptcy and discharge the debt.  File the tax return later in the year and you will have to wait 3 years after October 15th instead of April 15th and be sure to add a couple of extra days because April 15th may fall on a holiday or weekend.  I normally add 10 days past the date the return was due such as April 15th ot October 15th.
  • Code 308. Additional tax per audit. This is similar to the additional tax assessed which tolls (extends) the 240 day waiting period.
  • Code 480. Offer in Compromise pending. Code 481 OIC rejected or returned, Code 482 withdrawn. The IRS is required to consider an offer in compromise when the tax liability or collectability is in doubt. Often they want more from you in your offer in compromise than they would have gotten in bankruptcy. Submitting an offer in compromise will extend the waiting period from the date of submission until the offer in compromise is rejected or returned plus a 30 days for the 240 day rule.
  • Code 488. Installment agreement. Installment agreements allow you to age the account the three years so you can discharge the income tax debt in bankruptcy. There are partial payment agreements which will not pay off the debt because the interest is greater than the payments. If your financial situation is bad enough you may even qualify for being Currently not Collectible Code 530.
  • Code 520. Tax litigation, bankruptcy, or collection due process appeal Essentially anything including filing a case with the US Tax Court in Washington DC will extend the waiting periods. Some cases have suspended collection and the waiting periods for years. However if you case is frivolous you can be assessed the cost of litigation which can include flying a federal judge to your location.
  • Code 530. Currently not collectible status. If your financial situation is bad enough such as you are on social security you may qualify for being currently not collectible. Every year the IRS will monitor your income and if it remains low you will stay inside this program. Just like installment agreements the debt will age until it becomes dischargeable. Code 537 means you started making and income again and the IRS can now collect again. Code 537 means the uncollectible status is reversed.
  • Code 534. Collection statute expired. The most delightful code is the csed date this is the statute of limitations for income taxes. 10 years after your assessment, collection is supposed to cease see Internal Revenue Code section 6502 . However, the IRS is not perfect and you may have to remind them the debt has run the csed date and collections should cease. You can ask for a collection due process hearing if they forget but this is not normally necessary. There are also taxpayer advocates in the tax department who can assist you with problems like this. Any tax lien is released.
  • Code 539. Trust fund recovery cases. Trust taxes are primarily employer withholding taxes or sales taxes. These monies never belonged to the business owner or the corporate officer. If these taxes are not turned over to the tax department it can become a criminal matter and prosecuted as theft. Never fail to pay these taxes because they are never dischargable in bankruptcy and the IRS or state tax department in Kentucky will not hesitate in filing liens against the owner of the business. I have seen cases where the Kentucky state tax department has handed the case over for a felony prosecution and obtained convictions.
  • Code 550, 560. Assessment or collection SOL expires also code 608. Similar to the csed date.
  • Code 592 tax liens. Yes the tax department can file a lien against your home for your income taxes or unpaid business taxes. I have had clients which lost their homes or who had to file bankruptcy to pay off tax debts. Normally income tax liens self release after 10 years when the csed date expires with Code 534. Tax liens are administrative liens which cannot be stripped in bankruptcy. You can stirp judicial liens and perhaps a second mortgage which has no equity in the property in bankruptcy. But you cannot strip income tax liens which attach by a statue even if there is no equity.

Helpful Links for This Article:

Tax Account Transcript

IRS Tax Transcript

Tax Codes

Tax Discharge Determinator

Kentucky Bankruptcy Manual - Nick C. Thompson, Bankruptcy & Foreclosure AttorneyResources for Bankruptcy

Income Tax Bankruptcy Forms

Bankruptcy Manual

Other Related Information

IRS Transcript Codes for Bankrupting Taxes

Tax and Bankruptcy Lawyer for Business Trust and Income Tax

Chapter 13 and IRS Tax Returns and Refunds in Bankruptcy

State Income Tax Bankruptcy

File Bankruptcy on Income Taxes

How to Bankrupt Taxes

If you are thinking about filing bankruptcy, don’t delay because timing is crucial. I am here to help you. So, contact my office right away to start the conversation. Nick C. Thompson, Bankruptcy Lawyer: 502-625-0905.

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