Does Filing for Bankruptcy Really Give You Tax Relief?

by Gray Reed & McGraw
Contact

When times get desperate and tax liabilities pile up – filing for bankruptcy is an option many people consider.  Taxes are “dischargable” in bankruptcy, but there are important rules you need to know.

TIMING

Taxes are only dischargable if they have reached a certain vintage.  Here are the basic rules:

  1. More than three years must have elapsed since the tax return was due.
  2. Taxpayer must have filed his/her tax return  more than two years earlier than the bankruptcy petition.
  3. At least 240 days must have elapsed since the date of an IRS assessment.

Lots of things can extend these time periods including various administrative remedies with the IRS – like filing an offer in compromise.

Bottom line – you need to get IRS Account Transcripts and carefully calculate each time frame to make sure you qualify.

FRAUD EXCEPTION

Taxpayers must also beware of the fraud exception to dischargability in bankruptcy.  Taxes are not dischargeable if the person “willfully attempted to evade the tax.”  This doesn’t mean that you have to be a criminal to lose your ability to discharge the tax.

An example of this came recently out of the 10th Circuit in the Vaughn case (114 AFTR 2d 2014-5191).    Apparently, James Vaughn was a successful businessman who made millions from the sale of his company.  Instead of paying the tax owed, he got into a “BLIPS” tax shelter that was marketed by KPMG.

The Court thought, in my words:

  • He was a sophisticated guy and he should have known that the BLIPS transaction was not legitimate.
  • The IRS put him on notice that the transaction was not legitimate through IRS Notice 2000-44.
  • He depleted his assets through extravagant purchases (expensive homes, cars, jewelry, etc).

These things were enough to push him from the negligent category to the “willful” category.  I’m not sure I agree with the entirety of what the court decided, however.  The taxpayer did seek advice of a highly regarded accounting firm in KPMG.  Additionally, he also went through a divorce and much of his wealth went to his ex-wife.

The bottom line is you cannot purposefully avoid a tax, spend like crazy to dissipate your assets, then file for bankruptcy.  If you do so, not only will you not get your taxes discharged in bankruptcy, but you will likely be looking at going to jail.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Gray Reed & McGraw | Attorney Advertising

Written by:

Gray Reed & McGraw
Contact
more
less

Gray Reed & McGraw on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.