I have an IRS notice sitting on my desk. I meant to
call the IRS about it on Friday, but it got away from me. I will call on
Monday. It disgruntles me, as I have already called and considered the matter
resolved.
There you have why practitioners get upset with the
IRS about hair-trigger or bogus notices: one has only so much time.
My partner brought in this client. They were chronic
nonfilers, and we prepared the better part of a decade’s worth of returns for
them. I lost humor with them when the husband insulted one of my accountants.
Granted, it is unlikely that a younger accountant would know what I know, but
the incident was uncalled for. The
husband and I had a very different and blunt conversation.
They spoke with my partner about discharging the taxes
through bankruptcy, which is one reason I was brought in.
Short answer: forgetaboutit, at least for a while.
There are four basic requirements to discharging taxes
in bankruptcy. I have not often seen the fourth reason, but I was recently reading
a case involving that elusive fourth.
Here are the four requirements:
(1) The taxes were due at least three years ago.
Obtain an extension and you must include the extension period in the three
years.
(2) Fail to file and the taxes are not
dischargeable until at least two years after filing.
(3) The IRS must have assessed the taxes at least
240 days before filing for bankruptcy.
(4) The return must not be fraudulent, and the
taxpayer(s) cannot willfully have attempted to avoid the tax.
Let’s go through an example.
(1) Let’s say we are talking about your 2016 tax
return. If you filed on April 15, 2017, the first rule gives you a minimum date
of April 15, 2020.
(2) Let’s say you filed that 2016 return on July
21, 2018. The second rule gives you a minimum date of July 21, 2020.
(3) Let’s say the IRS posted (that is, assessed) the
2016 return shortly after filing – perhaps July 31, 2018. There is no problem
with the 240-day rule.
(4) Let’s also say there was no attempt to evade
tax. It was irresponsible not to file, but there is nothing there other than irresponsibility.
Seems to me that the earliest you can file for discharge
via bankruptcy would be July 22, 2020 – the latest of the above dates.
Let’s talk about a case involving the fourth
requirement.
There is a doctor. Her husband was a CPA – he lost his
license after a conviction for tax evasion.
She let her husband prepare the returns for years 2004
through 2014.
I would not have done that, but - to me – a CPA losing
his license for tax evasion is a HUGE dealbreaker, husband or not.
The entered into a payment plan. They missed some
payments.
Like night follows day.
They were living the high life. They had an expensive
house (Newport), but they wanted a more expensive house (Dwight). They bough
Dwight on a land contract, hoping to sell Newport.
They then carried two houses, as Newport did not sell.
Now they were tight on cash, and they fell behind with
the IRS.
Mind you, that did not stop them from sending their
kids to a private school, racking up $325,000 in the process. They also took trips
to Mexico and Puerto Rico, as well as parking a Jaguar and a Lexus in the driveway.
Newport was foreclosed.
In 2016 we have the bankruptcy.
The IRS moved to exercise its lien on the Dwight property.
Husband came up with a brilliant scheme. He sold Dwight for a swan song to a former client. He would pay the IRS the few dollars that
came his way from the “sale,” and he and his wife would rent the Dwight property
back from the former client.
Puuhleeeese, said the IRS.
The Court agreed with the IRS. It spotted a willful
attempt to evade or avoid, thereby nixing any discharge of taxes although the
couple had filed for bankruptcy.
Why? They failed the fourth requirement.
The case for the home gamers is re Harold 2020 PTC
58 (Bankr. E.D. Michigan 2020)
