Tax debt not dischargeable after SFRI have written several times about discharging income tax debt in bankruptcy.  Some time ago I wrote a post that dealt with the question of whether a return filed after a substitute for return is a return for bankruptcy discharge purposes.  At the time, I reported that the question hadn’t been addressed by the Ninth Circuit Court of Appeals.  That statement is no longer correct.


Martin Smith v. IRS


I watched the oral arguments in Martin Smith v. IRS case that took place on May 12 at 9:00 a.m.

The Court sided with the IRS in this case, and held that Mr. Smith’s tax debt was not dischargeable in his Chapter 7 bankruptcy case.  This case illustrates the old maxim that bad facts make bad law.

The Court summarized Mr. Smith’s history with the IRS:

After Martin Smith failed to timely file his 2001 tax forms, the IRS prepared a Substitute for Return or “SFR” based on information it gathered from third parties.  In March 2006, the IRS mailed Smith a notice of deficiency.  Smith did not challenge the notice of deficiency within the allotted 90 days and the IRS assessed a deficiency against him of $70,662. Three years later, in May 2009, Smith filed a Form 1040 for the year 2001 on which he wrote “original return to replace SFR.”

The fact that Mr. Smith filed his return seven years late, and three years after the IRS had filed an SFR clearly bothered the Court.  On that basis the panel held:

Here, Smith failed to make a tax filing until seven years after his return was due and three years after the IRS went to the trouble of calculating a deficiency and issuing an assessment.  Under these circumstances, Smith’s “belated acceptance of responsibility” was not a reasonable attempt to comply with the tax code.

Suppose Mr. Smith had filed his return a month after the IRS filed the SFR.  Would the Court have sided with him?  Probably not because of the locution:  “. . . after the IRS went to the trouble of calculating a deficiency and issuing an assessment.”  In sum, it appears that a return filed after an SFR is not a return for bankruptcy discharge purposes in the Ninth Circuit.


Discharging tax debt:  Late filed return, but before the IRS files an SFR


What if you file a return late, but before the IRS files an SFR?  Will that return qualify as a return for bankruptcy discharge purposes?  The Court never considered the question.  Therefore, the Fifth Circuit’s draconian holding in In re McCoy, 666 F. 3d 924 (5th Circuit 2012) (a late filed return is not a return for bankruptcy discharge purposes) has not yet polluted Ninth Circuit jurisprudence.  So, at least for now, if you’re in the Ninth Circuit and you filed your return late, but there was no SFR, then if you satisfy the three-year, two-year, 240-day rule, you should be able to discharge the tax debt in bankruptcy.

If you’re a debtor in the Central District of California who is considering using bankruptcy to deal with your debts, call an attorney who is a board-certified bankruptcy law specialist to represent you.


Based on Flicker Image  (Licensed) by Chris Potter

CourtroomI have written several times about discharging income tax debt in bankruptcy.  My most recent post on this topic dealt with the question of whether a return filed after a substitute for return is a return for bankruptcy discharge purposes.  I reported that the question hasn’t been addressed by the Ninth Circuit Court of Appeals.  That is about to change.

In a society with a government class and a nongovernment class, the government class will naturally protect itself against the nongovernment class.  I hope the Ninth Circuit will break from that mindset and do the right thing in the Martin Smith v. IRS case.  Oral arguments are scheduled for May 12 at 9:00 a.m., and I intend to watch them at:

If you’re a debtor in the Central District of California who is considering using bankruptcy to deal with your debts, call an attorney who is a board-certified bankruptcy law specialist to represent you.


Image courtesy of Flickr (Licensed) by Karen Neoh

Oh no The IRS will arrest me if I dont pay nowI’ve written before about IRS scams involving a call or robocall supposedly from the tax agency demanding immediate payment and threatening arrest if the payment isn’t made.  However, I’m still getting calls from anxious clients rattled by these calls.  Let me repeat, the IRS will never call you to demand immediate payment over the phone.

Here’s what the IRS has to say about this scam:

The IRS will never:

  • Call to demand immediate payment over the phone, nor will the agency call about taxes owed without first having mailed you several bills.
  • Call or email you to verify your identity by asking for personal and financial information.
  • Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
  • Require you to use a specific payment method for your taxes, such as a prepaid debit card.
  • Ask for credit or debit card numbers over the phone or e-mail.
  • Threaten to immediately bring in local police or other law-enforcement groups to have you arrested for not paying.

If you get a phone call from someone claiming to be from the IRS and asking for money or to verify your identity, here’s what you should do:

If you don’t owe taxes, or have no reason to think that you do:

  • Do not give out any information. Hang up immediately.
  • Contact TIGTA to report the call. Use their “IRS Impersonation Scam Reporting” web page. You can also call 800-366-4484.
  • Report it to the Federal Trade Commission. Use the “FTC Complaint Assistant” on Please add “IRS Telephone Scam” in the notes.


Stay safe, my readers.  Do not fall for these IRS scams.

However, if you really do have debts and are being harassed, either by legitimate collectors, or by scam artists, consider filing for bankruptcy protection.

And if you are a debtor in the Central District of California, and want to get relief from your creditors, or deal with overwhelming tax debt, contact an extremely knowledgeable and highly skilled bankruptcy/tax attorney to guide you through the process.


Image based on Flickr (Licensed) by zenjazzygeek

Social Security checkI have written in great detail about the treatment of social security income in a bankruptcy case.  What happens outside of bankruptcy?  The answer is obvious:  It depends.

Well, that was a worthless answer, wasn’t it?  Not so fast.  What if I throw in some statutory authority?  And if you act right now, operators are standing by to give you a special deal on some case law!

It turns out that my apparently flippant answer, “It depends,” really is correct.  Let’s see why.


I.  What The Right Hand Giveth


The federal statute dealing with social security is the Social security Act (no big surprise there), which is Chapter 7 of Title 42 of the U.S. Code.   Among its many provisions is what appears to be a blanket protection of social security benefits from the depredations of all creditors except the IRS (with emphasis added): Continue Reading Can A Creditor Garnish My Social Security Check?

Adam and EveIn the Genesis account of the Fall, when the Lord asked Adam if he had sinned by eating of the tree of the knowledge of good and evil, Adam immediately pointed the finger at his wife, Eve, as the cause of his disobedience:  “And the man said, The woman whom thou gavest to be with me, she gave me of the tree, and I did eat.”  Gen. 3:12.  The Lord then confronted Eve, who immediately pointed the finger at the serpent:  “And the woman said, The serpent beguiled me, and I did eat.”  Gen. 3:13.  The serpent had no fingers, so he couldn’t point the finger at anyone. What does this have to do with tax law?  Aside from the droll assertion of many that the IRS is actually the Infernal Revenue Service that is run by Old Scratch, himself, and Will Rogers witticism on the resulting corruption of the population, “The income tax has made more liars out of the American people than golf has,” it illustrates the tendency of spouses to sometimes blame each other for their malefactions.

However, while Adam was wrong when he blamed his wife for his own crime, sometimes a spouse can legitimately aver genuine innocence regarding income tax liability.  Such a defense is unsurprisingly called the “Innocent Spouse Relief.”

What is involved in successfully claiming innocent spouse relief?


1.  Joint And Several Liability When Filing A Joint Return


When a married couple files a joint income tax return, the spouses are jointly and severally liable for any tax debt for the given tax year.  What does this mean?

They are jointly liable as a marital unit ― probably not a surprise to you ― meaning that the IRS can go after them as a couple.

And they are severally liable, meaning that each one is on the hook for the entire tax debt.  This means that while the IRS cannot collect more than the total amount owed, it can go after one spouse for the entire amount and leave the other spouse alone.  As the IRS has stated:

Thus, both spouses on a married filing jointly return are generally held responsible for all the tax due even if one spouse earned all the income or claimed improper deductions or credits.  This is also true even if a divorce decree states that a former spouse will be responsible for any amounts due on previously filed joint returns.

Topic 205 – Innocent Spouse Relief (Including Separation of Liability and Equitable Relief)).

However, under the innocent spouse relief, one spouse can be relieved of joint and several liability.

There are three separate forms of relief available, though technically only one is called innocent spouse relief.  The other two are:  “Separation Of Liability Relief” and “Equitable Relief.” Continue Reading Dealing With Tax Debts – The Innocent Spouse (And Other) Relief

IRS forms on desk with coffeeMy last post dealt with two ways of dealing with tax debts:  1) immediately pay in full or 2) discharge the tax debt in bankruptcy.  This post deals with two more approaches: 3) enter an Offer In Compromise or 4) enter an Installment Agreement:


3.  Enter An Offer In Compromise


An offer in compromise (generally referred to in the IRS literature either as “compromise,” or as “OIC,” though I have had some agents call it an “offer”) is a way to reduce your tax debt and pay the reduced amount over a twenty-four month period.  An OIC is similar in spirit to a bankruptcy, but you resolve only your tax liability:  None of your other debts are addressed.  However, if you have other debts, the payments you make on them can help lower the amount you end up paying to the IRS (for linguistic simplicity I’ll stick with the IRS, but many other taxing authorities have similar ― but not identical ― OIC programs).

There are three grounds under which the IRS will accept an OIC:  (a) doubt as to liability; (b) doubt as to collectability; and (c) effective tax administration.  Here is the way the IRS describes these three grounds. Continue Reading Dealing With Tax Debts: Part 2

Taxes w Ben Franklin imageYou’ve fallen behind on your tax obligations.  The IRS has sent you notices, which you didn’t open ― after all, who needs the aggravation.  You’ve just received a notice of levy from your bank.  It’s that time, it’s Miller time.  No, wait; that’s not the right commercial.  It’s tax debt resolution time!

What can you do to resolve your problems with the IRS?  Ben Franklin is reputed to have written, “In this world nothing can be said to be certain, except death and taxes.”  If you can’t pay that certain tax debt, you could turn to the other side of Franklin’s quote and commit suicide, but that’s not a great choice.  Or you could move to a country with no extradition treaty with the U.S.  Unfortunately, most of those countries are run by psychopathic tyrants, so again, not a great choice.

There are four main ways to resolve tax obligations:  (1) pay them in full right away; (2) discharge them in bankruptcy (if possible); (3) enter an offer in compromise; and (4) enter an installment agreement.  Which one should you use?  As you might have guessed, the answer is simple to state:  It depends.  “On what?” you ask impatiently.  To answer that second question we need some background.

First a couple of important facts:


The Return Filing Requirement


One thing is certain no matter which approach you use:  To resolve your tax problems you must first file a return for the year(s) in question.  If you haven’t filed a return, you are ineligible for any relief.


The Collection Statute


26 U.S.C. § 6502(a) has a ten-year statute of limitations on IRS collections, measured from the day the tax is assessed by the IRS.  A tax is assessed when the IRS enters the assessment into its internal system.  The ten-year limitation is specific to the IRS.  Other taxing authorities have different limitations periods.  For example, according to Cal. Rev. & Tax. Code §19255(a), the California Franchise Tax Board has a twenty-year statute of limitations on collections.  Jerry Brown wants your pound of flesh to pay for his train set).

With these truisms out of the way, let’s look at the four aforementioned approaches in seriatim.  Today’s blog covers the first two: pay in full and discharge your tax debts in bankruptcy.  The next blog will cover the third and fourth approaches: Offer in Compromise and Installment Agreements. Continue Reading Dealing With Tax Debts: Part 1