240-Day Assessment Rule

Taxpayers are denied a discharge of any tax debt that has been assessed by the Government less than 240 days before the bankruptcy case was filed.

All income tax debt is discharged by a general discharged order entered pursuant to Section 727 (Chapter 7) or Section 1328 (Chapter 13), except those types of debt specifically excepted from discharge. Section 523 contains the exceptions to discharge. Section 523(a)(1)(A) excepts from discharge any debt for a tax of the kind specified in Section 507(a)(8). This cross-reference to Section 507(a)(8) excepts from discharge the unsecured priority claims of a governmental taxing authority.

So, priority tax claims are not discharged. But, what is a priority tax claim? A tax claim is granted priority status if the taxpayer violates either (1) the “3-year priority look-back period,” or (2) the “240-day assessment period.” The 3-year priority look-back period is discussed in the next webpage section. The 240-day assessment period is described in the paragraph below.

240-day assessment period: Section 507(a)(8)(A)(ii) designates a tax claim as a “priority” tax claim for unpaid income taxes assessed by the taxing authority within 240 days before the date of the filing of the bankruptcy case. This provision is commonly called the “240-day assessment period.” A tax debt assessed with the 240-day period is deemed a priority tax debt and is not eliminated by the general bankruptcy discharge of Chapter 7 and Chapter 13.

Section 507(a)(8)(A)(ii)(I) provides that the 240-day assessment period is statutorily tolled for any time during which an offer in compromise with respect to that tax was pending or in effect during that 240-day period, plus 30 days. Similarly, Section 507(a)(8)(A)(ii)(II) provides that the 240-day assessment period is statutorily tolled for any time during which a stay of proceedings against collections was in effect in a prior bankruptcy case during the 240-day period, plus 90 days.

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.

This blog contains some interesting legal cases involving taxpayers attempts to discharge income tax debt by filing bankruptcy.

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