The following is an excerpt from:

"For Whom the Tax Tolls: Significant Events That Extend IRS Collection Rights"

Published in Tax Practice & Procedure - October/November 2004

By Michael S. Fried and Zachary S. Fried

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1998, 1999 and 2000 Tax Liabilities

We began by examining the bankruptcy timing rules in connection with the client's 1998, 1999 and 2000 tax liabilities. The 1998 tax return was file on October 15, 1999, and the tax owed for this period was nominal. The 1999 and 2000 tax returns were file on March 15, 2002, and on April 29, 2002, the taxpayer was assessed a liability of $10,000 for 1999, and a liability of $25,000 for 2000. The taxpayer's liabilities for 1998, 1999 and 2000 were not included in his recently terminated offer in compromise. Since an offer in compromise only tolls the bankruptcy time periods for the taxes included in it, the three-year look back, the two-year filing and the 240-day assessment periods were not tolled for Dr. Delinquent's 1998, 1999 and 2000 tax liabilities (despite the fact that the offer in compromise for his other tax liabilities was still pending when the 1998, 1999 and 2000 taxes were assessed).

Since the taxpayer's 1998, 1999 and 2000 tax liabilities were assessed after the client's bankruptcy was terminated in 1997 and none were included in his December 1998 offer in compromise, no tolling events applied to the tax liabilities for those years. Accordingly, it seemed as if a straight forward calculation of the three-year look back (return due date), the two-year filing and the 240- day assessment periods would provide the answer to whether the 1998, 1999 and 2000 tax liabilities were eligible for Chapter 7 or Chapter 13 discharge. We were correct about our assumptions concerning the 1998 and 1999 tax liabilities, but wrong about the year 2000 assumptions.

Examining the three bankruptcy time periods in connection with the taxpayer's 1998 and 1999 liabilities proved simple. Taking into account all filing extensions, the tax returns for 1998 and 1999 were both due more than three years ago, satisfying the three-year look-back period. Additionally, the tax returns for these two years were both file more than two years ago, and the taxes for these years were both assessed more than 240 days ago. Thus, the three-year look-back period, two-year filing period and 240-day assessment period had all expired for Dr. Delinquent's 1998 and 1999 tax liabilities, making them eligible for discharge in a Chapter 7 or Chapter 13 bankruptcy.

However, the pending 2000 liability was a bit more troublesome. The client wanted us to file a bankruptcy immediately to release the levy on his bank account and end other aggressive IRS collection activity. Although we were sure that the 240-day assessment and two-year filing periods had expired, we were concerned about the three-year look-back period applicable to both a Chapter 7 and a Chapter 13 discharge. The 2000 tax return was file more than two years ago, thereby satisfying the two-year filing rule, and the related tax liability was assessed more than 240 days earlier, satisfying the 240-day assessment rule. However, compliance with the three-year look-back rule was questionable. The taxpayer's request to extend the due date of his 2000 tax return from April 15, 2001, to October 15, 2001, was denied by the IRS. Therefore, we were hopeful that the original April 15, 2001, due date would apply to our calculation and that the taxpayer's liability for 2000 would qualify for discharge under the three-year look back rule. However, in reviewing case law, we discovered a problem. Although the taxpayer's extension request was denied by the IRS, the cases indicated that taxpayers cannot rely on the original due date for their tax return, April 15, but rather must use the extended due date shown in their extension requests (even if denied by the IRS) for purposes of calculating the three-year look back period. Since our client had requested an extension of the due date for his 2000 tax return to October 15, 2001, the expiration of the three-year look back period in connection with his 2000 tax return would not occur until October 15, 2004, a date remaining one month in the future. For the next 30 days, this problem would disqualify Dr. Delinquent's 2000 tax liability from discharge in either a Chapter 7 or Chapter 13 bankruptcy.

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