IRS Practice and Procedure News Briefs for January 2021

DISCHARGE OF TAXES IN BANKRUPTCY – In re Alexander, Dk. No. 19-05033, Adv. Pro No. 19-5033 (D. Conn. 2020)

Why this Case is Important: While income taxes generally are dischargeable in bankruptcy, certain requirements must be met for a discharge to be granted. Filing bankruptcy too early, as the taxpayer did in this case, is a major mistake that could have been avoided with competent legal advice.

Facts: In Alexander, the taxpayer owed past-due income taxes for 2011 through 2015. She timely filed her returns for all of these years, including having filed her 2015 return on October 17, 2016. In February 2017, after the IRS threatened to take certain collection actions against the taxpayer with respect to her 2015 debt, she filed a request for a collection due process hearing. The hearing was not closed until October 2017. Under the Internal Revenue Code, the IRS was prohibited from taking action to collect the 2015 liability the entire time the hearing was open. On October 31, 2019, the taxpayer filed for Chapter 7 bankruptcy. In the course of the bankruptcy, she filed an adversary proceeding against the IRS in an effort to have her 2011 through 2015 liabilities discharged. The IRS conceded that the 2011 through 2014 liabilities should be discharged but contested the 2015 discharge on the basis that not enough time had passed between the filings of the taxpayer’s 2015 return and bankruptcy petition.

Law and Conclusion: Under Section 507(a)(8) of the Bankruptcy Code, income taxes are not dischargeable in bankruptcy unless (1) the tax return in question was due more than three years before the bankruptcy filing; (2) the return was filed more than two years before the bankruptcy filing; and (3) the tax to be discharged was assessed at least 240 days before the bankruptcy filing. These time periods are extended by the time that the IRS was prohibited from collecting the tax because of the taxpayer’s filing of a request for a collection due process hearing, plus 90 days. In this case, if the taxpayer had not requested a collection due process hearing, her 2015 taxes would have been dischargeable as of October 17, 2019 (three years after the 2015 return was due) and therefore would have been discharged by way of her October 31, 2019 bankruptcy filing. However, because the taxpayer’s collection due process hearing was open for eight months, during which time the IRS could not take action to collect her 2015 liability, her 2015 taxes were not dischargeable in bankruptcy until 3 years and 11 months after the 2015 return was due. With the return due in October 2016, the earliest the taxes could be discharged was September 2020. Therefore, the Court found in favor of the IRS and the 2015 taxes were not discharged.

UPDATING ADDRESS ON FILE WITH IRS – Gregory v. Commissioner, No. 19-2229 (3d Cir. 2020)

Why this Case is Important: This case reverses a decision of the Tax Court discussed in the April 2019 edition of Newsbriefs and eases the burden on taxpayers to update their addresses on file with the IRS by placing a greater burden on the IRS.

Facts: In Gregory, the taxpayers filed their 2014 joint income tax return using their home address in Jersey City, New Jersey. The IRS selected the return for examination. While the audit was ongoing, the taxpayers moved to Rutherford, New Jersey. In the course of the audit, the taxpayers used their new address in multiple forms they sent to the IRS, including a power of attorney and a consent to extend the statute of limitations, though they never filed an IRS Form 8822, Change of Address. When the IRS issued a Notice of Deficiency in 2016 proposing an assessment against them of additional taxes, it was sent to their old Jersey City address. As a result, the taxpayers did not receive the notice until January 2017, after the deadline for filing a Tax Court petition had passed. They still immediately filed a petition. In response, the IRS filed a motion to dismiss the petition for being filed late. The Tax Court granted the motion and dismissed the taxpayers’ petition based on them not having followed IRS procedures for updating their address by filing a Form 8822. The taxpayers appealed the decision to the Third Circuit Court of Appeals.

Law and Analysis: While the IRS has provided specific guidance and instructions for taxpayers who need to update their address by means other than filing a tax return, the Court pointed to case law that has required the IRS to use reasonable diligence to determine a taxpayer’s last known address. “Reasonable diligence” is measured by what “the IRS knew or should have known at the time it sent the notice of deficiency,” including information it should know “through the use of its computer system.” Based on the taxpayers having submitted to the IRS a power of attorney and other forms showing their new address and verbally communicated their new address to IRS agents, the Court determined that the IRS should have reasonably known the taxpayers’ correct address. That being the case, the Court overturned the Tax Court’s grant of the IRS’s motion to dismiss, thereby allowing the taxpayers to move forward with their petition disputing the IRS’s notice of deficiency. It is worth noting that the Tax Court will only be required to follow this precedent in cases originating in Pennsylvania, New Jersey, Delaware, and the U.S. Virgin Islands.

If you would like more details about these cases, please contact me at 312-888-4113 or jnesser@lavellelaw.com.