CHICAGO: 312 332 7555 SCHAUMBURG: 847 705 7555
Blog Post
Tim’s Tax News on the Tenth – September 2020
Timothy M. Hughes • September 10, 2020
CAN BANKRUPTCY DISCHARGE A TAX LIABILITY?
With the economic uncertainty created by COVID-19, many people have contacted our office about options in dealing with their debts, which for many include IRS debt. Over the years, our firm has helped numerous clients with tax debts via an Offer in Compromise, Abatement of Penalties, or favorable Installment Agreements. We have also in the right circumstances helped by filing bankruptcy for clients to eliminate (or greatly reduce) their tax obligations. Yes, some taxes can be discharged in bankruptcy.
Income taxes can be discharged if they meet a four-part test.
The first test is:
if the tax year is older than three years (for example 2016, which was due without an extension on April 15, 2017), you add three years to that filing due date arriving to April 15, 2020, therefore 2016 and earlier years could be discharged, provided that there was no extension. If, however, there was an extension, then October 16, 2020, would be the operative date, provided the next three tests are met.
Second test:
The returns must be filed at least two years before the bankruptcy filing date. A fairly straight forward and simple test, however, if the IRS were to prepare a return for the taxpayer (called a Substitute for Return –SFR), then that would prevent this test from becoming operative for the client. Assuming that no SFR was prepared and the returns were filed more than two years before, and then the year (or years’) liability could be discharged, provided the next two tests are met.
Third test:
The bankruptcy is filed at least 240 days after the IRS makes its assessment for that tax year. This simple step (but very critical), can be verified by reviewing IRS transcripts in a pre-filing due diligence step necessary to ensure the taxpayer’s taxes can be discharged.
Fourth test:
The last test is not as objective as the above three tests. The final test boils down to this question: “was the liability accrued as a pattern of fraud?” Again, like the first three tests, this test requires a thorough understanding of the client’s case, as well as being able to argue the merits of why the liability accrued.
The above four-part test is for both federal and state income taxes. Unfortunately, employment tax (trust fund) and sales and use tax are not dischargeable in bankruptcy.
Our firm has helped many of our clients to meet the four-part test requirements and to ultimately successfully have both their federal and state income taxes discharged in bankruptcy.
If you would like more details, please do not hesitate to call our office. Our office has been successful in helping taxpayers with IRS and IDOR collection problems for over 28 years. If you have a tax or debt problem, please contact me at 847-705-9698 or thughes@lavellelaw.com
and find out how we can help you.
Are you receiving the Lavelle Law eNewsletter? Sign up today and receive valuable updates and perspectives on a wide range of legal issues: http://goo.gl/pjeJkm
Lavelle Law, Ltd. is registered with the Illinois Department of Financial and Professional Regulation as an approved continuing education provider for CPE for CPAs and Enrolled Agents. If your organization is seeking CPE courses in the area of Business Law, Innocent Spouse Relief, IRS Collections, Tax Scams (including ID Theft) or other areas in tax law that can be taught at your office, please contact me at thughes@lavellelaw.com.
More News & Resources
Lavelle Law News and Events
This article will serve as another update to the ongoing Corporate Transparency Act developments. As of February 17, 2025, a federal judge in the Eastern District of Texas lifted the injunction it had ordered on January 7, 2025, in Smith v. U.S. Department of the Treasury, 6:24-cv-00336 (E.D. Tex.), allowing the federal government to once again enforce the Corporate Transparency Act and its Beneficial Ownership Information Report requirements.
This article is the second in our Litigation 101 series. It focuses on the flip side: how to sue someone else.
Suing someone is a serious decision that requires careful thought and preparation. Before pursuing legal action, it’s crucial to reflect on the issue and understand the steps involved in bringing a lawsuit. This article outlines the basics to help you approach the process with confidence and make informed decisions.
On December 11, 2024, we published an article titled “Corporate Transparency Act on Hold: Key Implications for Businesses,” which addressed the nationwide injunction impacting the enforcement of the Corporate Transparency Act and its Beneficial Ownership Information Reporting rule.
Since then, there have been a few significant legal developments that businesses should monitor closely. While the Financial Crimes Enforcement Network is currently prohibited from enforcing BOIR requirements, ongoing litigation, and the related appeals may alter this status. Below, we provide a timeline of key events and insights into what business owners should anticipate moving forward.
The Internal Revenue Service is issuing automatic payments to eligible people who did not claim a Recovery Rebate Credit on their 2021 tax returns. The payments are in follow up to an IRS announcement last month of the intent to take this special step. The IRS took this step after reviewing internal data showing many eligible taxpayers who filed a return but did not claim the credit. The Recovery Rebate Credit is a refundable credit for individuals who did not receive one or more Economic Impact Payments (“EIP”), also known as stimulus payments.
The Fair Labor Standards Act (FLSA) establishes federal minimum wage and overtime pay requirements, with exemptions for employees in bona fide executive, administrative, professional, computer or outside sales roles. 29 U.S.C. § 213. Employees classified as "outside sales" must primarily engage in making sales or obtaining contracts for services or the use of facilities, and they must conduct their work primarily away from their employer’s place of business. 29 C.F.R. § 541.500.
Amendments to BIPA
SB 2929 became effective on August 2, 2024. Codified as 740 ILCS 14/10 and 14/20, this Act introduced two pivotal changes to BIPA that dealers should be aware of:
• Limiting Per-Scan Damages: The amendments clarify that a single violation under BIPA accrues per type of violation, rather than per scan. This significantly reduces the financial exposure for dealerships.
• Electronic Consent: The amendments formalize electronic signatures as a valid means of securing biometric consent, streamlining compliance processes for businesses.
The National Taxpayer Advocate recently released her annual report to Congress. A few highlights from the report are summarized in this article.
Nearly 300 New Illinois Laws are going into effect in 2025. Listed below are some that may have a significant impact on you or your business.
As we say farewell to 2024, we’re excited to look back on the unforgettable moments from our Koozie Challenge! From the frozen wonders of Antarctica to the excitement of the Paris Olympics, and countless incredible destinations in between, the Lavelle Law koozie truly went the distance this year! A big thank you to our clients, staff, family, and friends who took part in the fun. Here’s to even more adventures in 2025! Happy New Year from Lavelle Law!
Schaumburg-based Lavelle Law wrapped its annual food drive benefiting the Schaumburg Township Food Pantry. During the month of October, Lavelle Law set up collection boxes around Schaumburg and the surrounding area, where residents and workers could drop off nonperishable food items, paper goods, personal care items, baby food and diapers. Participants could also make cash donations online.
STAY UP TO DATE
Subscribe to our newsletter
OUR LOCATIONS
Phone: 312 332 7555
Fax: 312 332 4611
Fax: 847 705 9960
Created by Olive + Ash.
Managed by Olive Street Design. 