The Bankruptcy Code prescribes five rules that apply to discharging income and non-trust fund taxes in bankruptcy. They are:
1. The Three year rule on timely filed tax returns – Section 507(A)(B)(A)(i)
2. The Two year rule on late filed tax returns – Section 507(A)(B)(A)(1) (C)
3. The 240 day assessment rule – Section 507(A)(B)(A)(ii)
4. No Fraudulent return rule – Section 523(A)(1)(C) and
5. No Tax Evasion Rule – Section 523(a)(1)(B).
If a taxpayer has filed all of his or her returns and is not subject to the consumer debt rules of BAPCPA, the taxpayer will get a discharge.
What does a taxpayer do when he or she does not know the last time he or she filed? Or if he or she does know, the records necessary to prepare the returns may be so sketchy, uncorrelated or incomplete that it is impossible to do the returns.
The IRS is usually satisfied with the last six year’s returns. The state may go back 25 years on substitute for returns. In most cases, if we prepare the last six year’s returns for the IRS and the IRS plus the returns the state or IRS SFRs, we can safely discharge a taxpayer’s tax debt and obtain a fresh start.
There is a dilemma, however. When a taxpayer signs a bankruptcy petition, it is signed under the penalty of perjury. What a bankruptcy judge or trustee are particularly after, when the jurad is signed, are upreported or transferred assets. This could be a criminal matter. However, when a taxpayer signs under the penalty of perjury, it does not apply to just assets. It applies to all schedules on the bankruptcy petition.
In a word, if a taxpayer has ot filed tax returns for many years, the case could be made he or she has not disclosed all of his or her debts. The taxpayer is vulnerable to a challenge by a tax agency under the No Tax evasion Rule.
Enter Dana’s rule number Six for non-filers looking to obtain a discharge of his or her tax debts: Obtain a written installment agreement from the IRS and/or State tax agency prior to filing the bankruptcy petition. The IRS and California, and most states are the same, will not enter into an installment agreement unless all returns they require are filed.
With the written installment agreement as evidence, if is unequivocal tht even the harshest IRS or state legal counsel could challenge the bankruptcy discharge. It is bullet proof. You will get your discharge!
Dana M. Ronald 3/11/11