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Discharging Taxes in Bankruptcy - Part Three

Priority tax claims, as referenced in 11 U.S.C. 507(a)(8), include the following categories:

  • Taxes measured by income or gross receipts
  • Unsecured property taxes assessed prior to bankruptcy[1]
  • Tax required to be collected or withheld “for which the debtor is liable in whatever capacity
  • Certain employment taxes
  • Certain excise taxes
  • Certain customs duties

Pre-petition interest on priority tax claims is also subject to priority status.

Priority tax claims, or priority status, may be granted under the three-year rule. “Priority status is accorded under the ‘three-year rule’ if a tax has been assessed for a taxable year ending on or before the date of the filing of the bankruptcy petition. In other words, post-petition taxes are not priority tax claims. (They are administrative tax claims)” (Armknecht). In addition, the tax return must have been due less than three years prior to the date of the filing. The date upon which the return is due becomes a major issue for determining the impact of the three-year rule and how priority status is applied. The three-year rule principle also applies to extensions.[2]

Priority tax claims, or priority status, may also be granted under the 240-day rule. Priority status is granted under this rule if taxes are assessed within 240 days of the petition date (Armknecht). “Typically, the 240-day rule applies [when] additional taxes are assessed as a result of an IRS examination or the taxpayer’s filing of an amended return” (Armknecht). Taxes are assessed when the taxpayer is given a notice of alleged deficiency; within this context, the taxpayer has the right to challenge the deficiency. “The date of assessment is the date upon which the proposed tax described in the notice of deficiency becomes final” (Armknecht). If the 240th day falls on a weekend or legal holiday, then the date would be pushed back to the next prior business day (Armknecht). Debtors should request an accurate assessment date by requesting a Certificate of Assessments (Form 23-C) from the IRS.

Priority tax claims may also fall under the post-petition rule. Post-petition refers to those taxes assessed after the bankruptcy petition date. “These are taxes for which the statute of limitations for additional assessments has not run out on the date the debtor files bankruptcy” (Armknecht). Priority status is considered when the IRS assesses income taxes prior to the expiration of the three-year period, “beginning the day after the date on which the return was filed or is deemed filed” (Armknecht). Taxpayers that agree to extend the statute of limitations may also be afforded priority status.

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[1] These are taxes that are “payable without penalty less than one year prior to the filing of the petition” (Armknecht).

[2] Extensions are typically requested using IRS tax Form 4868, Automatic Extension to File Federal Income Tax Return. Filing for extension automatically extends the due date of the return by four months for filers of Form 1040.

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