Tim’s Tax News on the Tenth – September 2020
Timothy M. Hughes • September 10, 2020
CAN BANKRUPTCY DISCHARGE A TAX LIABILITY?
With the economic uncertainty created by COVID-19, many people have contacted our office about options in dealing with their debts, which for many include IRS debt. Over the years, our firm has helped numerous clients with tax debts via an Offer in Compromise, Abatement of Penalties, or favorable Installment Agreements. We have also in the right circumstances helped by filing bankruptcy for clients to eliminate (or greatly reduce) their tax obligations. Yes, some taxes can be discharged in bankruptcy.
Income taxes can be discharged if they meet a four-part test.
The first test is:
if the tax year is older than three years (for example 2016, which was due without an extension on April 15, 2017), you add three years to that filing due date arriving to April 15, 2020, therefore 2016 and earlier years could be discharged, provided that there was no extension. If, however, there was an extension, then October 16, 2020, would be the operative date, provided the next three tests are met.
Second test:
The returns must be filed at least two years before the bankruptcy filing date. A fairly straight forward and simple test, however, if the IRS were to prepare a return for the taxpayer (called a Substitute for Return –SFR), then that would prevent this test from becoming operative for the client. Assuming that no SFR was prepared and the returns were filed more than two years before, and then the year (or years’) liability could be discharged, provided the next two tests are met.
Third test:
The bankruptcy is filed at least 240 days after the IRS makes its assessment for that tax year. This simple step (but very critical), can be verified by reviewing IRS transcripts in a pre-filing due diligence step necessary to ensure the taxpayer’s taxes can be discharged.
Fourth test:
The last test is not as objective as the above three tests. The final test boils down to this question: “was the liability accrued as a pattern of fraud?” Again, like the first three tests, this test requires a thorough understanding of the client’s case, as well as being able to argue the merits of why the liability accrued.
The above four-part test is for both federal and state income taxes. Unfortunately, employment tax (trust fund) and sales and use tax are not dischargeable in bankruptcy.
Our firm has helped many of our clients to meet the four-part test requirements and to ultimately successfully have both their federal and state income taxes discharged in bankruptcy.
If you would like more details, please do not hesitate to call our office. Our office has been successful in helping taxpayers with IRS and IDOR collection problems for over 28 years. If you have a tax or debt problem, please contact me at 847-705-9698 or thughes@lavellelaw.com
and find out how we can help you.
Are you receiving the Lavelle Law eNewsletter? Sign up today and receive valuable updates and perspectives on a wide range of legal issues: http://goo.gl/pjeJkm
Lavelle Law, Ltd. is registered with the Illinois Department of Financial and Professional Regulation as an approved continuing education provider for CPE for CPAs and Enrolled Agents. If your organization is seeking CPE courses in the area of Business Law, Innocent Spouse Relief, IRS Collections, Tax Scams (including ID Theft) or other areas in tax law that can be taught at your office, please contact me at thughes@lavellelaw.com.
More News & Resources
Lavelle Law News and Events
Other than payroll costs, there is generally no other larger ongoing cost that a business pays than its commercial lease obligation. Moreover, often the term for a typical commercial lease will extend far into the life of any business. Finally, there are a multitude of ways in which a poorly drafted lease can cause a business to incur significant unforeseen costs. Accordingly, it is critical that every business devotes the necessary resources, including the use of an experienced lawyer, to negotiate a fair lease.
A recent press release by the IRS addressed the Fiscal Year (“FY”) 2024 (Oct. 1, 2023 – Sept. 30, 2024) Data Book, describing the Agency’s activities. For the first time, revenue collected exceeded 5 trillion dollars, accounting for 96% of total government revenue. The IRS’s expenditures to collect over $5 trillion were $18.2 billion for overall operations in FY 2024, with 90,516 full-time equivalent employees.
As life changes, it is important to recognize major life events when it is pertinent to prepare, review, or update estate plan documents. Whether you recently got married, just had a baby, bought a house, went through a divorce, have an adult child, or are acquiring assets that may need tax planning provisions, be proactive and make sure the proper estate plan documents are in place.
Key strategies and tools to protect business assets were the topics of Lavelle Law’s Breakfast Briefs presentation on May 21, 2025. Attorneys Matt Sheahin and Jennifer Tee presented important legal strategies for business owners as well as business and office managers, business brokers, and insurance professionals. Topics included Non-Compete Agreements, Shielding Trade Secrets, Nuances of Temporary Restraining Orders (TROs), Injunctive Relief, Contracts, and Managing Risks.
Our client contacted us for advice regarding the termination of a long-time employee who was failing to meet performance standards. Our client already provided several accommodations for this employee, but they still were not meeting the mark.
When people hear “estate planning,” they often picture wealthy individuals with sprawling mansions and complex assets. But the truth is, everyone — regardless of income, age, or family size — can benefit from having an estate plan.
The Internal Revenue Service recently issued a press release addressing the IRS Whistleblower Office’s publishing its first-ever multi-year operating plan that outlines its guiding principles, strategic priorities, recent achievements, and current initiatives to advance the IRS Whistleblower Program.
If enacted, the Junk Fee Ban Act would protect consumers from hidden fees and promote fair business practices in Illinois. While there has yet to be legislation in the proposed Junk Fee Ban Act that excludes dealerships, it will be important to look for future updates on this bill, as Illinois is quickly becoming a hub for vehicle innovation and automotive plant expansion.
When someone passes away owning property in another state, their estate may need to go through ancillary probate—a secondary court process in that state.
Lavelle Law represented a joint venture in its $9.9 million acquisition of four multi-unit buildings.
