Kevin Murphy, Esq. Andreozzi Bluestein LLP 9145 Main Street Clarence, NY PH# (716) , Fax# (716)

Transcription

1 Kevin Murphy, Esq. Andreozzi Bluestein LLP 9145 Main Street Clarence, NY PH# (716) , Fax# (716)

2 PART 1 BASIC TAX ISSUES IN BANKRUPTCY

3 Tax Collection Defense Offer in Compromise Statute of Limitations [10 yrs. from date of assessment} Installment Agreement BANKRUPTCY

4 {Video Presentation}

5 IRS- A Unique Creditor

6 3 Types of Pre-Petition Tax Claims Secured Priority General Unsecured (See Exhibit 1 in Outline)

7 Secured Tax Claims Creation of a tax lien-assessment Creates lien on All property Secret Lien - starts collection process I.R.C. 6323(a) perfection of lien (See Exhibit 2 in Outline) Notice of Federal Tax Lien (NFTL) (See Exhibit 3 in Outline)

8 To Be Secured in BK IRS must have: NFTL, prior to BK Equity to attach

9 Key Practice Point: *Exemptions do not apply to IRS -but in BK: If tax is old enough to discharge as non-priority, and no lien filed, tax is wiped out on exempt assets.

10 EXAMPLE 1 Debtor has $500k IRA No NFTL Tax is non-priority dischargeable IRA is exempt Tax wiped out Home Run

11 EXAMPLE 2 Debtor has $500k IRA NFTL prior to BK Tax is non-priority dischargeable IRA is exempt Tax is wiped out- no in personam liability Tax lien stays on exempt asset IRS can pursue post BK

12 EXAMPLE 3 IRA- $100k NFTL filed Debtor owes income tax 2013 (dischargeable)- $100k 2014 (non-dischargeable)- $100k If filed BK secured priority (non-dischargeable) Total cost $200k

13 Pre-Bankruptcy Strategy Pre-BK designation of payment $100k IRA liquidated- paid to 2014 Leave 0 for 2013, not secured any longer Total cost = $100k

14 CAVEAT: Excluded Assets 401(k), ERISA Qualified Plan- excluded Does not go through BK estate Assessment lien stays on asset post BK IRS will pursue See Wadleigh v. Commissioner, 134 T.C. 280 (2010)

15 (See Exhibit 4) Priority Tax Claims BK 507(a)(8) Income Tax (8)(A)(i)-(iii) 3 Rules: i- 3 Year Rule ii- 240 Day Rule iii- Not assessed, but legally assessable

16 (i) 3 Year Rule Priority if: Return for the year in issue was due within 3 years of BK Must take into account extension

17 (ii) 240 Day Rule Priority of tax is assessed w/i 240 days of BK 240 days tolled while: OIC is pending or in effect, plus 30 days While prior BK pending, plus 90 days

18 Tolling Provisions of 507(a)(8) An otherwise applicable time period specified in this paragraph shall be suspended for any period during which a government unit is prohibited under applicable nonbankruptcy law from collecting a tax as a result of a request by the debtor for a hearing and an appeal of any collection action taken or proposed against the debtor, plus 90 days; plus any time during which the stay of proceedings was in effect in a prior case under this title or during which collection was precluded by the existence of 1 or more confirmed plans under this title, plus 90 days. Exhibit 5- Final Notice of Intent to Levy

19 Impact of Timely Appeal Good: Goes to IRS Appeals Officer Stops Collection Right to go to Tax Ct. to appeal adverse decision (Abuse of discretion) Bad: Stops statute of limitations on collection Stops BK priority provisions for dischargeability + 90 days

20 Strategy: Don t file a timely CDP! Pursuant to IRC 6330, a timely CDP stops collection and meets all of the requirements of the hanging paragraph. Timely appeal must be filed within 30 days. If appeal is timely, adverse decision can be appealed to U.S. Tax Court. An untimely appeal, however, (beyond 30 days, but within 1 year) will allow for an Equivalency Hearing. By policy (not statute), the IRS will grant an appeals hearing and hold collection. There are no Tax Court appeal rights to an adverse decision. EQUIVALENCY HEARING DOES NOT TOLL THE PRIORITY PERIODS FROM RUNNING. CONSIDER FILING LATE!

21 For a CDP to be timely, must be filed within 30 days. 30 days from what? According to Weiss v. Commissioner, 147 T.C. No. 6, the 30 days runs from when the notice is mailed, not from the date on the notice. TAX TRAP: How do you know when the notice is mailed?

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24 Other Actions that Stop Collection But do not stop the priority periods: Innocent Spouse Request Request for Installment Agreement 911 Taxpayer Assistance Order Request Potential Tax Trap: Equitable Tolling- Look out for new case law

25 (iii) Not Assessed, but Legally Assessable (With exceptions) How long does the IRS normally have to assess? - 3 years from the date return due or filed, whichever is later. Unless 1. 25% omission of income 2. Consent to extend statute 3. Tax Court litigation and

26 523(a)(1)(B) Delinquent Return Unfiled Late within 2 years of BK 523(a)(1)(C )- Fraud or Willful Evasion If still assessable due to these reasons, not a priority claimbut excepted from discharge Exhibit 4

27 Exception to Discharge 523(a) Priority Taxes Delinquent Returns -SFRs don t count as a return/irs position- cannot be fixed (filing & waiting 2 years) Late return filed within 2 years of BK -but hot issue-mccoy line of cases depending on circuit, late return may never be dischargeable despite 2 year rule. One Day Late Rule - 1 st, 5 th and 10 th Cir.

28 Fraud 523(a)(1)(C ) Fraud Penalty Assessed If fraud is asserted and sustained, the tax is never dischargeable, however, the fraud penalty, as with other non-pecuniary loss penalties, can be discharged in a Chapter 7 after 3 years from the date of the related transaction, and immediately in a Chapter 13. Willful Evasion There are legions of cases holding an exception to discharge under this provision where debtor willfully evades the payment of tax (case by case facts).

29 Payroll Taxes Reported on Form 941- taxes are broken down into 3 parts. Withholding from employees wages for their taxes Withholding from employees wages for their FICA Employer s contribution First 2 parts held in trust for the government- always considered priority in BK.- Government can pierce corporation under I.R.C and go personally against a responsible person. Note: Can also criminally prosecute under I.R.C (States sales tax- same status)

30 Interest and Penalties Interest is part of the tax- if tax is priority, so is interest In a Chapter 13, however, unsecured dischargeable priority income tax claims can be paid without interest. [In a Chapter 13 priority income taxes are dischargeable, but full payment is required for confirmation. If there is an exception to discharge, (i.e. late filing), however, interest will survive BK.] Penalties can be discharged in a Chapter 7 if they relate to a transaction that is more than 3 years prior to BK.

31 Miscellaneous Points The Means Test applies to cases that are primarily consumer debt. Taxes are not considered consumer debt (majority). BK Code 505 allows Bankruptcy Court to determine a tax liability that has not previously been adjudicated. IRS will not sever a tax year. Liability for the year of bankruptcy will be post-petition tax liability, not payable out of the estate unless I.R.C election is made to split tax year. Applies only in Ch 7 and individual 11. Post-petition tax liabilities in a Chapter 13 can be included in the plan, pursuant to BK Code 1305.

32 EXAMPLES

33 1. client owes income tax for Timely filed return on 4/15/16. Priority? Dischargeable? 2. client owes income tax for Timely filed return. Audited and assessed 8/1/18. Priority? Dischargeable?

34 3. client audited for Return timely filed 4/15/15. Tax court petition filed and pending with tax court. Priority? Dischargeable? 4. client owes income tax for 2013, assessed in 2015 based on SFR. Priority? Dischargeable?

35 5. client owes income tax for Timely filed return. Assessed 2/1/17. Fraud penalty applied. Priority? Dischargeable? 6. client assessed income tax for Timely return filed 4/15/15. Audit, Assessed 5/1/17, OIC filed on 10/1/17. Denied but appeal is still pending. Priority? Dischargeable?

36 7. client owed for Return filed timely on 4/15/13. Tax assessed 4/2015. OIC submitted 11/2015. Accepted and paid in 10/16. 4/10/18 state seizes clients bank account and client can t pay 2017 fed taxes. OIC defaults. IRS sends cp504 for Priority? Dischargeable? 8. client owes income tax for Timely return on 4/15/15. CDP filed on 2/15/16. Pending until 9/15/16. Priority? Dischargeable?

37 9. client owes income tax for Timely return. NFTL filed. Priority? Dischargeable? 10. client owes income tax for 2013 return filed on 3/1/2015. Priority? Dischargeable?

38 11. client owes income tax for 2013 return filed on 3/1/2015, after IRS filed SFR. Priority? Dischargeable?

39 {Video Presentation}