The 11th Circuit Standard for Determining the Priority Status of Tax Claims Involving Successive Ban

The 11th Circuit ruled that bankruptcy courts have the power to pause the three-year period for certain tax claims. This issue has been argued in various courts and has led to inconsistent results for debtors and the IRS. A key purpose of bankruptcy is to give a fresh start to honest debtors, but there are exceptions to the discharge of debts, including certain tax claims. These exceptions are carefully interpreted in favor of the debtor. Section 523(a)(1) of the Bankruptcy Code lists types of taxes that cannot be discharged in bankruptcy. This includes income taxes for unfiled or late returns, fraudulent returns, and taxes due within three years of filing for bankruptcy. The IRS has to assess the taxes at least 240 days before the bankruptcy petition for them to be non-dischargeable. If a debtor offers a compromise to the IRS before filing for bankruptcy, the 240-day period is extended by 30 days to prevent abuse of the system. There are no extensions for successive bankruptcy filings mentioned in the law. The IRS can start collecting taxes once they’ve been assessed. During bankruptcy, the IRS has specific time periods to collect taxes without them being discharged. Once the IRS files a notice of federal tax lien, they can still go after the debtor’s property even after bankruptcy. A study showed that most people who file for bankruptcy have very little money or assets. The IRS argued that they need more time to collect taxes from these bankrupt people. But if the bankrupt people don’t have any assets to give, then they should be able to get a fresh start without waiting too long for the IRS. In the Morgan case, a couple filed for bankruptcy twice, and the IRS tried to collect taxes owed. The first bankruptcy was dismissed after four years because the couple couldn’t make all the payments. The Morgans filed for bankruptcy a second time in January 1995, and the IRS said they still owed taxes from 1987, 1988, and 1989. The Morgans argued that because the taxes were more than three years old, they should be treated like regular debts, not priority claims. But the court said the three-year limit was paused during the Morgans’ first bankruptcy, so the IRS still had priority for the taxes. The Morgans appealed the decision. The issue in the Morgan case was whether the three-year time period for income tax claims can be paused during a previous bankruptcy. The Morgans argued that their tax liabilities should be treated as regular debts and discharged in their second bankruptcy, but the IRS said the time period should be paused during the first bankruptcy. The court decided that without pausing the time period, the taxes would be discharged in the second bankruptcy. The 11th Circuit had to decide if the time limits for filing for bankruptcy protection could be extended. They had to balance the needs of people who owe money and the needs of those who are owed money. They decided that the law doesn’t explicitly allow for extending the time limits, but the bankruptcy court can sometimes use its power to extend them. So, they sent the case back to the bankruptcy court to consider whether the time limits should be extended in this particular case. In simple terms, the 11th Circuit Court said that bankruptcy courts have the power to make fair adjustments to claims. They can use Section 105(a) of the Bankruptcy Code to do this. In a case called Morgan, the court said that the bankruptcy court can extend the time for certain types of claims to be discharged. This is a change from previous standards. In another case called Odell, a bankruptcy court said that a person’s tax debt could be wiped out in bankruptcy. The court had to decide if the IRS had more time to collect taxes from Odell, even though the law said they had a limited time period. The court decided that the IRS did not have extra time and that the time period had expired. The IRS in the Odell case argued that they needed more time to collect taxes because it takes a while for them to start the collection process again after a bankruptcy case is dismissed. However, the court found that the IRS had enough time to file a notice of federal tax lien, which gives them priority over other creditors. In similar cases, the court should use the same standard for determining whether taxes can be discharged in bankruptcy. The court should consider whether the taxpayer acted in bad faith or committed fraud. The court in the Odell case did not consider the same standards as the Haas case when deciding whether to extend the time limit for the IRS to collect taxes. Instead, they should have used the same standard as the Haas case for determining tax discharge matters. The court should consider extending protections to debtors under certain circumstances. If the debtor hasn’t done anything wrong and doesn’t have any assets for the IRS to take, they should be protected. If the IRS didn’t have time to file a notice of federal tax lien because of the debtor’s bankruptcy filings, they should be given time to do so. If the debtor has done something shady (like hiding money or lying), the IRS should be able to deny a tax discharge. The IRS has certain protections when it comes to bankruptcy. The court can deny the discharge of taxes if the IRS proves bad faith or fraud. However, the court should also consider the rights of the debtor and other creditors. If the IRS can’t prove bad faith or fraud, then the discharge of taxes should not be denied. Instead, the IRS should be allowed to protect its interests in other ways, like filing a notice of federal tax lien. If there is bad faith or fraud, then the discharge of taxes can be denied. Section 105 of the U.S. Bankruptcy Code allows the court to make any orders it needs to follow the rules of the code. In certain cases, the time limits for the IRS to collect taxes can be paused, or “tolled,” during a bankruptcy. This means the IRS can continue to try to collect taxes even if the time limit has passed. There have been different court cases about whether and when the time limits can be paused. The IRS says it needs enough time to collect taxes, while others say the rules should be followed exactly. A law professor wrote a detailed article about these issues. He used to work with clients and the IRS on tax cases, so he knows a lot about these issues.

Source: https://www.floridabar.org/the-florida-bar-journal/the-11th-circuit-standard-for-determining-the-priority-status-of-tax-claims-involving-successive-ban/