21ST ANNUAL DFW AREA CHAPTER 13 CONFERENCE

DETERMINING THE
DISCHARGEABILITY OF
UNSECURED INCOME TAX
DEBTS
BREAKING THE CODE OF THE IRS
ACCOUNT TRANSCRIPTS David B. Coffin, J.D., CPA
October 22, 2012 DAVID COFFIN PLLC
4209 GATEWAY DR., STE. 200
COLLEYVILLE, TX 76034
(817) 410-5709 (office)
(817) 691-1280 (cell)
(888) 588-4026 (fax)
DavidCoffinLaw.Com
DCoffin@DavidCoffinLaw.Com

DETERMINING THE DISCHARGEABILITY OF UNSECURED INCOME TAX DEBTS

A.

Introduction

This outline will cover three areas:
(1) General elements of dischargeability for income taxes;
(2) How to read IRS account transcripts to determine dischargeability of income tax liabilities; and
(3) How to “catch” those taxes which will be unsecured but nondischargeable.
B.
General Rules Regarding Dischargeability of Income Taxes
Federal taxes, to some extent, are dischargeable. A detailed review of the rules regarding dischargeability is beyond the scope of this presentation, but the general rules for discharging income taxes are listed below:
Rule 1: 3 Year Rule – due date for the return must be more than 3 years prior to the petition date (11 U.S.C. §507(a)(8)(A)(i)).
The first rule requires that the due date of the return be more than 3 years prior to the petition date. Note that under this rule, the practitioner is determining when the return was actually due, including extensions, not when the return was actually filed. The practitioner should identify the tax year for which a discharge is sought, then count three years back from the proposed petition filing date to see if the return was due either within or beyond this time frame. If the return was due beyond this time frame, then the tax for that period passes this test and is not a priority tax under this subsection.
Rule 2: 240 day rule – The tax must have actually been assessed more than 240 days prior to the petition date. (11 U.S.C. § 507(a)(8)(A)(ii)).
If the tax year for which the debtor is seeking a discharge passes the 3 year rule, the practitioner must then determine whether the IRS assessed the tax more than 240 days prior to the petition date. This rule asks the bankruptcy practitioner to identify exactly when the tax for a particular tax year was actually assessed,1 or posted on the IRS’ books. Typically, the income taxes resulting from a filed tax return are assessed (or put on IRS’ books) near the time the return is received by the IRS.
Be aware that there are times when, such as pursuant to a subsequent IRS audit or examination, the taxes are assessed against the taxpayer well after the return is filed. The IRS may conduct an audit of a particular tax year and assess 1

The assessment of a tax is essentially a bookkeeping notation, and is made when the Secretary or his delegate establishes an account against the taxpayer on the tax rolls. In re Hosack, 282 F. App'x. 309, 313 (5th Cir.
2008), citing Laing v. United States, 423 U.S. 161, 170 n. 13, 96 S.Ct. 473, 46 L.Ed.2d 416 (1976).

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DETERMINING THE DISCHARGEABILITY OF UNSECURED INCOME TAX DEBTS

taxes for that year within 3 years from the date the return is filed.2 Moreover, this period can be extended. Tax periods and returns that are subject to an IRS audit or examination deserve close scrutiny under this rule.
Rule 3: 2 Year rule - The return must have been actually filed more than 2 years prior to the petition date (11 U.S.C. §523(a)(1)(B)).
Under this rule, the bankruptcy practitioner should identify the date the Form
1040 was filed with the IRS and make sure that the bankruptcy petition is filed more than 2 years from the date of filing the return. If no return was filed by the debtor, then the tax for that year is not dischargeable.3
Rule 4 – No Fraud: Tax is not dischargeable if the debtor filed a fraudulent return (11
U.S.C. 523(a)(1)(C)).
Income taxes for a particular tax year are not dischargeable if the debtor has filed a