Dischargeability of Taxes - Understanding basic IRS transcript information
While such a topic cannot be fully addressed in only 5000 characters; there are basics which every competent attorney should understand. An IRS Transcript of Account clearly sets out basic information needed to determine whether an income tax debt is priority and whether it is excepted from discharge.
The first key information is the "account balance plus accruals" which is the total current debt as of the stated date with interest and penalites. The actual tax only can be calculated from tax assessed less payments.
The second key piece occurs on the very first line under "Code 150" when it states "tax return filed" (or substitute for return prepared by IRS). An actual return or equivalent report must have been filed so as not to trigger the exception to discharge under §523(a)(1)(B)(i). Substitute for return situations require special attention and will be addressed in a later guide.
The Code 150 line also has a "Cycle date" which is the date the return was actually assessed. This is key to computing the priority end date under the §507(a)(8)(A)(ii) 240 day rule; and is also the starting date for the IRS 10 year statute of limitations on collection. A quick review of the balance of the transcript codes will tell you whether and when any offer-in-compromise or litigation/prior bankruptcy was filed as this might toll the 240 day computation if they occurred within the initial 240 day period.
Right above the Code 150 line is the "Return due date or return filed date (whichever is later)". This is the trigger date under §523(a)(1)(B)(ii) for computing whether the return was late filed within 2 years.
Finally, if it exists, immediately below the Code 150 line are one or more Code 460 Extension to file date codes. These indicate whether the taxpayer filed an extension to Aug. 15th or Oct. 15th of the tax due year. Many counsel and clients get burned by believing they filed timely only to later find an extension was filed. The law is clear, priority is calculated from the return due date as extended. See In re McDermett, 286 BR 913 (MD FL 2002)(Timely filed extension controls even if debtors filed by 4/15. Application to extend is automatic and not moot or void as unnecessary).
Five quick details can generally answer the questions of the balance owing; when the return was filed; whether an actual return was filed; when it was assessed; and whether any extension was filed. These can answer the typical questions of whether the tax is still priority under the 3 year or 240 day rules (the first discharge exception) and whether an actual return was filed, and filed at least two years prior (the second and third discharge exceptions).
Since most state returns are filed at the same time as the Federal returns, these key pieces of information can usually also determine priority and dischargeability of state income taxes. However, be sure to ask the client if they filed state returns, and if at the same time .