The Bankruptcy Code and the Tax Code cross paths on a regular basis. One example of this is when a taxpayer has filed a “Collection Due Process” Appeal with the IRS and used it to eventually negotiate a payment plan.
While the Collection Due Process appeal has it's advantages…it stops IRS collections, buys time, and allows you to discuss your legal proposal with an IRS appeals officer rather than a revenue officer or IRS automated collections… it has a downside when it comes to filing bankruptcy.
When the appeal is filed, the clock that determines when tax debt can be discharged in bankruptcy is “tolled” or stopped.
A few basic tax discharge rules:
1. The bankruptcy must be filed at least 3 years after the tax return was due to be filed including extensions.
2. The bankruptcy must be filed at least 240 days after the IRS places the amount you owe in it's records. (known as the “assessment” date)
These time periods are tolled while the collection due process appeal is in place plus an extra 90 days. You can see the bankruptcy code section at 507(a)(8)(G).
An example of how this works:
If your 2009 tax return was filed on May 28th of 2010, and assessed on May 28th of 2010 and no extension to file was used:
The 3 year rule would require that the bankruptcy be filed on or after April 15th 2013, 3 years+ from the date the return was due to be filed, (not the date actually filed has to do with a separate rule – the two year rule not discussed here)
The 240 day rule would have easily been met by the time the 3 year rule was met.
The tax debt would meet the date requirements for bankruptcy discharge on the latest required date or the 3 year date requirement here.
However…if you filed a collection due process appeal at any time between your assessment date and the 3 year date above…both the 3 year date and the 240 day date would be tolled by whatever time period you were in the appeal process plus ninety days.
If the appeal process were 6 months long or 180 days, than the 3 year rule wouldn't be met until 270 days + days after the original 3 year rule was met or April 15th, 2013 + 270 days.
You may be surprised at how often the time spent in an appeal isn't reviewed prior to filing a bankruptcy case. Many bankruptcy filers think that their tax debt is going to be removed and find out after the bankruptcy case is over that a step in the analysis was missed.
If you have a large tax debt…and are considering bankruptcy, be certain that the history of your account with the IRS is closely reviewed and that all the events that toll the time periods are taken into account. It may be necessary to stay in the IRS payment plan for a longer period than you had hoped in order to make the bankruptcy code work for you.
Only timely filed collection due process appeal requests toll the 3 year and the 240 day rules. Timely filing is 30 days from the date the IRS mails the Final Notice of Intent to Levy.
Late filed collection due process appeal requests shouldn't toll these periods. Sometimes it makes sense to file the collection due process appeal late.