Behind every IRS tax audit lurks the state taxing authority. Fail to give the state its due, and the tax in question may be non dischargeable.
I had to dredge this tidbit from memory last week when we were looking over the tax transcript for a client who had been audited by the IRS and assessed a whopping tax bill. To his good fortune, that newly assessed tax will be dischargeable 241 days after the audit assessment. But, I asked, had he reported the results of the IRS audit to our state income tax authority? “No,” he said. “Why?”
Because state law requires the report of an assessment of taxes by the feds to trigger the statute of limitations on the state tax. Until the newly assessed tax is reported to the state, the statute does not begin to run. So while the federal income tax may be dischargeable in 241 days, the mirror image state tax remains assessable.
So follow the breadcrumbs through the Bankruptcy Code with me. Section 507(a)(8)(A)(iii) defines as a priority taxes which are not assessed prepetition but are assessable by applicable law or agreement. Section 523(a)(1) makes priority taxes non dischargeable. California state law makes the unreported additional tax imposed by audit assessable until a point after the state tax folks learn about it.
You can see the operation of these statutes in FTB v Jerauld, 208 BR 183 (9th Cir. BAP) and Maryland v. Ciotti, 638 F.3d 276(4th Cir. 2011).
Note that the priority tax definition also includes taxes that remain assessable “by agreement”. Standard operating procedure for taxing authorities who are in discussion with a tax payer about a tax issue is to “request” that the taxpayer sign an extension of the period in which the taxes can be assessed. The alternative, the taxpayer is told, is an immediate assessment.
Note here that just getting the IRS tax transcript here and finding the audit assessment does not get you the next, essential piece: the report, if required under the law of your state, to the state taxing authorities. You have to question the debtor or his tax professionals til you are satisfied that you’ve got good information.
Image courtesy of hekkeller.
as a practice point, i’d recommend ALWAYS getting the account transcript before advising a client definitively that a given tax will be discharged. getting the MFTRX, or account summary, provides you with all of the dates that the IRS will be using when calculating eligibility for discharge. it’s not uncommon for a client to say they filed an amended return on X date, only for the IRS to record it as actually filed some weeks later. Same with later tax assessments.
p.s. what the IRS calls the “Tax Transcript” is simply the numbers from the return stripped of all verbiage. it is not the detailed summary that one needs for evaluating dischargability, although i’ve often heard of the Account Summary being referred to as a tax transcript these terms refer to different things.
also as a practice point, these summaries can be obtained by the client very easily by going into any irs office and asking for it. this is the fastest way.