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February 06, 2015

Bankruptcy as a Collection Alternative for Tax Liabilities

The tax attorneys at Nardone Law Group in Columbus, Ohio, routinely advise individual taxpayers and businesses on how to utilize the Internal Revenue Service’s collection alternatives to manage their federal tax liabilities. The IRS has broad authority and tools available to collect delinquent taxes, including the ability to file a Notice of Federal Tax Lien. Therefore, if taxpayers are contacted by an IRS revenue officer, it is important to understand the various collection alternatives available to resolve federal tax liabilities. Some collection alternatives include: (i) offer-in-compromise, (ii) installment agreements, (iii) currently not collectible status, (iv) discharging taxes in bankruptcy, and (v) challenging the underlying tax liability. Utilizing a collection alternative may help prevent, or significantly reduce the effect of, an IRS collection action.

While collection alternatives can provide relief to taxpayers in certain situations, they are not simply a magic wand that makes debt disappear. For each collection alternative, there are certain criteria that must be satisfied and procedures that must be followed. When contacted by an IRS revenue officer, taxpayers should consult with an experienced tax attorney to find out what solutions and alternatives are available. Failure to properly utilize a collection alternative can lead to increased penalties, interest, and debt for the taxpayer. This was highlighted in a recent bankruptcy case, In Re Ollie-Barnes, where the court held that the debtor’s income tax liabilities were not dischargeable in bankruptcy.

Debtor’s Tax Liabilities Not Dischargeable in Bankruptcy

A U.S. Bankruptcy Court in North Carolina rejected a debtor’s claim that her federal tax liabilities were discharged in bankruptcy. The debtor had filed for bankruptcy twice before, with both cases getting dismissed, before commencing this third bankruptcy case in December 2009. The bankruptcy case was completed in July 2013, but was reopened at the request of the debtor, because she claimed she was receiving communications from the defendant creditor, as well as the IRS, concerning the collection of prepetition taxes. The debtor commenced an adversary proceeding, seeking declaratory relief, arguing that all of her debt owed during the pertinent years was fully discharged. The bankruptcy court considered two issues and ruled against the debtor with respect to both, concluding that her debts were not dischargeable.

For the first issue, the debtor argued that any claim omitted from a trustee’s report of filed claims is effectively disallowed, but did not cite any authority to support such an argument. The IRS filed three proofs of claims pertaining to the debtor’s tax liabilities for the pertinent years. The first proof of claim showed tax debts of approximately $34,000 and was not amended or withdrawn by the IRS, nor was any objection filed. The second and third proofs of claims were filed in error. The trustee listed the IRS allowed claim of $0.00 in its report of filed claims, but the court held that this neither resulted in disallowance or discharge of IRS’ first proof of claim in bankruptcy. The court’s decision was reinforced by the fact that the debtor had failed to object to the first claim entirely.

The second issue involved 11 USC 1328(a)(2), which excepts the discharge of certain debts. Specifically, the statute denies the discharge of taxes for which a late return or equivalent report was filed or given after two years before the before the date of filing the petition. Essentially, there is a two year look-back period to assess whether the debtor’s liabilities were dischargeable. The court used its equitable power to find that the two year look-back period was tolled during the debtor’s previous bankruptcy cases. In total, the debtor was only out of bankruptcy for a combined one year and eight months since she had filed her late return. Consequently the court found that the debtor’s tax liabilities, listed in the IRS’ first proof of claim, were excepted from the debtor’s discharge.

Contact Nardone Law Group

Nardone Law Group frequently represents individuals and businesses in federal tax matters, including collection alternatives, such as discharging taxes in bankruptcy. As the case above illustrates, utilizing a collection alternative often involves stringent substantive and procedural requirements.  If you or your business have been contacted by an IRS revenue officer, or are struggling with tax liabilities, you should contact one of our tax attorneys today. Nardone Law Group’s tax lawyers have vast experience representing clients before the IRS. We will thoroughly review your case to determine what options and alternatives are available to you.

Contact us today for a consultation to discuss your case.

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February 06, 2015

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