Income taxes are dischargeable by filing bankruptcy if the taxpayer waits more than the amount of time set forth in the Bankruptcy Code. One of the requirements is that the taxpayer must wait to file bankruptcy more than 240 days after the date the taxing authority “assesses” the tax. See 11 U.S.C. §523(a)(1) incorporating §507(a)(8)(A)(ii).
But when are income taxes deemed “assessed” such that the 240-day clock starts ticking? This issue was addressed in Harnden v. United States of America (In re Harnden), Nos. 08-B-71909, 10-A-96039 (Bankr. N.D.IL 2011), where the IRS had audited the taxpayer and determined that the taxpayer had underreported his income by about $30,000. The IRS sent the taxpayer Form 4549 (Income Tax Examination Changes) requesting that the taxpayer agree to the proposed increase in tax and waive any appeal rights. The taxpayer signed the form in August of 2006, which stated “I give my consent to the immediate assessment and collection to any increase in tax and penalties.” The IRS, however, did not officially assess the tax until February of 2008. The taxpayer filed the bankruptcy case in June of 2008, less than 240 days after the IRS had officially assessed the tax.
The Harnden court rejected the taxpayer’s argument that the IRS had effectively assessed the tax upon the taxpayer signing and returning the Form 4549 Income Tax Examination Changes. The court found that neither the notice the IRS sent nor the taxpayer’s signature and return of the tax examination changes form constituted an “assessment” of the additional tax.
The Harnden court found that the assessment of federal income tax is “made by recording the liability of the taxpayer in the office of the Secretary [of the Treasury] in accordance with rules or regulations prescribed by the Secretary.” 26 U.S.C. §6203. Those regulations delegate authority to “assessment officers” and state that the “assessment shall be made by an assessment officer signing the summary record of assessment. … The date of the assessment is the date the summary record is signed by an assessment officer.” 26 C.F.R. §301.6203-1.
Practice Pointer: Best practices warrant obtaining proof from the taxing authority of the official assessment date. For IRS debt, tax professionals must obtain copies of the IRS’ account transcript for each year that a taxpayer desires to discharge a tax obligation. The tax transcript can assure counsel that the taxpayer has waited the appropriate time to pass the various time sensitive rules.
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