Phone Adventures or “How does one get an “Account Transcript” from the IRS?”

This post is geared more towards attorneys practicing bankruptcy law, but it is useful to anyone trying to resolve income tax debt. I am following up on my last post about how to determine if income tax debt can be discharged in bankruptcy. First, as an attorney, you have to complete and have your client sign a Power of Attorney, Form 2848. Well, actually you have to back up a step further and obtain a CAF number from the IRS. You will need that CAF number in order to get anywhere with them.

Once the 2848 is completed, you send it in to the IRS so that they can either lose it or take weeks to process it. Oh, but do not worry, you can still proceed. You next want to get a Form 4506-T completed. You really should do this at the same time as the 2848 to save time. There are fax numbers of the back of the 4506 to send it to  and you only have to try that fax number a dozen or so times. More recent years can be obtained by calling the automated number for the IRS, but the transcripts can only be sent directly to the taxpayer’s address if you go that route.

Once the Account Transcripts come in, you need to look for those “520” codes I mentioned in the last post. If there are any on the transcripts, you will want to spend a leisurely afternoon on the phone listening to the Internal Revenue Services music interrupted by occasional transfers to different departments. Once you get to the right place, you will be grilled about who your are. They will look in the system and fail to find the 2848 that you had dutifully sent in per the instructions. Just go ahead and have a copy of the 2848 at hand because the person helping you will ask you to fax it directly to them.

Once that 2848 is in front of them, they will ask you to repeat information that is clearly spelled out on the form itself to “verify” things. It seems this only verifies that you faxed them the very same document they are looking at, but no matter. Now you are cooking with GAS – well, perhaps kerosene. It will just take a few seconds to get the closing code. If you want to forgo this whole experience, then look for a code “971” and see it there is one whose dates corresponds to the “520”. If so, you are safest to assume that the closing code is 77.

PS: By the by, attorneys, this is a time intensive and liability laden analysis, so be sure to charge separately from the bankruptcy for this procedure.

PPS: Be sure to get your client’s dates of birth – the IRS sometimes asks for this to verify that you are whom you say you are.

Discharge tax debt? Yes, you can…

I had a phone conversation just last week with an attorney who was surprised to learn that income tax debt can be discharged. I guess he had not read my prior post about this topic. The mistaken belief that tax debts are with you forever is prevalent with lay people and attorneys alike. The bankruptcy code takes one through a bit of a maze to figure out if the tax debts in question are capable of discharge. The code provisions include: 11 USC Sect 507(a)(8)(A)(i) & (ii), 523(a)(1)(B) & (C), 1328(a)(2).

The condensed summary of these provisions includes:

1. The due date for the tax return was three years ago or more.
2. The tax return was actually filed two years ago or more.
3. The tax assessment occurred 240 days ago or more or has not yet occurred.
4. The tax return was not fraudulent.
5. The taxpayer did not engage in tax evasion.

One needs to obtain a tax “Account Transcript” to be sure to calculate these requirements because certain things can “toll” or stop the running of these times.

Sshhhh, Don’t tell the IRS!

Stop right there! I am not recommending falsifying any document or failing to report anything you have a duty to report to the Internal Revenue Service. What I am talking about is a perfectly legitimate strategy to deal with a large amount of tax debt. Tax debt assessed on the basis of one’s income falls into two broad categories: priority debt which is not discharged in bankruptcy and non-priority debt which is discharged in bankruptcy. There is a rather complicated process one goes through to determine whether the tax debt one owes to the Department of Treasury, Internal Revenue Service or to your state is priority or not and I cannot go into that here. In fact, I have a flow chart that I always pull out and go through to make sure I hit all the different statutes involved.

The extreme shorthand version is that income tax debts less than three years old are probably priority and income tax debts older than that may be non-priority. However, to know for certain, one must obtain an Account Transcript for each tax year in question from the IRS.  This is NOT the same thing as a Tax Transcript which simply shows what was on your tax return if you have lost it. Rather, the Account Transcript gives key dates necessary to figure out the priority statue of the debt.

Now, here is the part to keep quiet about: a) you cannot discharge a priority debt in a Chapter 7, b) in a Chapter 13, priority debts must be paid in full so really large priority tax debts may keep one from filing a 13, c) once you get a discharge in a Chapter 7, you cannot file and get a discharge in a Chapter 13 for four years, but d) that priority tax debt that stayed with you through the Chapter 7 may well have matured into non-priority debt by the time you can file a Chapter 13. Thus, the Chapter 20 bankruptcy is born!

This strategy is a very long process taking anywhere from seven to ten years to complete, but trust me – if you do nothing a large priority income tax debt will survive with you far longer than that if you do nothing. If you have such a large priority income tax debt that you cannot create a feasible Chapter 13 plan, then a Chapter 20 (first a 7 and then a 13) may be the route to go. One key piece of information, though, is that there are certain things that cause a “tolling” or temporary suspension of the running of time limitations on the tax debt. The period of time you are in the Chapter 7 will toll the running of these times and the period of time where an offer in compromise is pending also tolls it. So, after the Chapter 7, you will want to contact the IRS and set up a payment plan that fits your budget. I have seen payments as low as $100.00 per month. Asking for $0.00 per month, though, will cause that same tolling issue, so you need to be making some monthly payment between the Chapter 7 and the Chapter 13.

Chapter 20 bankruptcy is also used in other ways where the 7 gets rid of certain debt and then allows for a 100% Chapter 13 plan which is filed right on the tail end of the Chapter 7 rather than waiting for four years, but that is beyond the scope of this post.