IRS Law Blog

Another great question from a reader on how the bankruptcy code and tax code can intersect when discharging taxes in bankruptcy.

Dear Mr. Levy,

We owe income tax from 2007.  We filed the return on October 15, 2008 with an extension.  We filed a collection due process appeal and had a hearing, agreeing to monthly payments of $100.00, which we have kept current.

My question is if we have met the proper time requirements for our income tax debt to be discharged in bankruptcy?

What stands out in your desire to use the bankruptcy code to solve your tax problem is the filing of the collection due process appeal (which is a creature of the tax code).

When you filed your collection due process appeal, you tolled two of the three timing rules in the bankruptcy code that allow taxes to be discharged. Those two rules require that a bankruptcy must be filed (1) three years after your tax return was due to be filed (including extensions) and (2) 240 days after the IRS officially places the amount you owe on its books (known as an “assessment”).

These two timeframes were tolled while your collection due process appeal was pending, plus an additional 90 days.  The tolling language is in bankruptcy code section 507(a)(8)(G).

(Note:  The third timing timing rule applied to late filed returns and requires a bankruptcy to be filed two years after a tax return was actually filed.  This rule was not tolled by your collection due process appeal because the two year rule is in a a different bankruptcy code section from the three year and 240 day rules).

With that background, let’s first apply the three year rule, 240 day rule and two year rule to your situation and solve your problem.  You state your 2007 return was timely filed on October 15, 2008.

Applying the three year rule, the earliest timeframe to discharge the IRS in bankruptcy would be October 15, 2011 (three years from when the return was due to be filed).

You should clearly meet the 240 day rule – the IRS likely put the amount you owe on its books shortly after you filed the return, which has been much more than 240 days ago.

As to the two year rule, it calculates to October 15, 2010 (two years from when the return was actually filed).

Ordinarily, your 2007 taxes would be eligible for a bankruptcy discharge on October 15, 2011, the latest of the three applicable timing rules.

But you filed a collection due process appeal, which tolled the ticking of the clock on both the three year rule and the 240 day rule.

Let’s presume the appeal took six months to resolve, which is fairly average for the IRS in these cases.  We must add those six months, plus an additional 90 days, to October 15, 2011.

After adding in this tolling from the collection due process appeal, your 2007 taxes should be eligible for a bankruptcy discharge after July 15, 2012 (Calculated as follows: October 15, 2011, plus six months while the appeal was pending, plus 90 days by law).

(Another note of value:  It is important to know that only timely collection due process appeals toll the three year and 240 day timing rules.  Timely collection due process appeals are those that are filed within 30 days from when the IRS sends out its Final Notice of Intent to Levy.  Late filed appeals – defined by the IRS as appeals filed more than 30 days after the Final Notice of Intent to Levy but still within a year after it was sent, should NOT toll the three year and 240 day rules.  This is because the bankruptcy code only references tolling in situations where the IRS is prevented from collecting by law – a situation present only when a collection due process appeal is timely filed).