Taxation & Estate Planning

Doing away with an audit result in bankruptcy.

By howardlevy

I received this referral this week about eliminating taxes in bankruptcy:

I was audited for my 2005 taxes and owe $55,000 to the IRS as a result.  I owe other debt in addition to the IRS liability, and was considering bankruptcy even before an IRS Revenue Officer came to my house and left her card in my door. Can I include the IRS in my bankruptcy?

Yes, a Chapter 7 bankruptcy can “discharge” taxes from IRS audits if certain “timing” rules from the bankruptcy code are followed. Those rules are:

1.     The bankruptcy must be filed 3 years after your 2005 return was due to be filed (the return was due to be filed on 4-15-06, so three years is 4-15-09); and

2.     The bankruptcy must be filed 2 years after your 2005 return was actually filed (the return was filed on time, on 4-15-06, so two years is 4-15-08); and

3.     The bankruptcy must be filed 240 days after your audit result became final (the audit was finalized on 10-15-07, so 240 days later is 6-15-08).

To determine our bankruptcy filing date to wipe out the audit result, we look for the latest of these three dates.  The latest of 4-15-09, 4-15-08 and 6-15-08 is 4-15-09.  That is the date when the audit liability would be eliminated in bankruptcy.

Until then, we will cooperate and negotiate with the Revenue Officer, which most likely means providing financial statements to her, to prevent any IRS levy action until next spring (4-15-09) when bankruptcy will eliminate the liability.

For more detail on discharging taxes in bankruptcy, see my recent article in the Journal of the National Association of Enrolled Agents, “But I Thought You Can’t Eliminate Taxes in Bankruptcy.“

Full post as published by IRS and the Law on July 26, 2008 (boomark / email).