MORGAN KING'S TRAPS CHECKLIST
52 Traps & Frequently Missed Issues
& Opportunities In Tax - Bankruptcy Cases
DISCHARGING TAXES IN CONSUMER BANKRUPTCY CASES
CHECKLIST OF FREQUENTLY MISSED OPPORTUNITIES AND TRAPS FOR THE UNWARY
The “¶“ citations refer to corresponding sections of King’s Discharging Taxes in Consumer Bankruptcy Cases - available at TaxPublishing.com
“The law concerning dischargeability of taxes and penalties is confusing at best, starting with the relevant statutes that are characterized by double and triple negative constructions and incorporate other statutes by reference." Judge Dana L. Rasure, Moore v. Oklahoma ex rel. Okla. Tax Comm'r (In re Moore) (Bankr. N.D. Okla., 2017)
√ 1. Failure to adequately explore client's tax history for willful evasion.
Chapter 7 debtor's intentional failure to file his federal income tax returns, together with his failure to pay taxes when he had
resources to do so, was sufficient to prove that debtor attempted to evade or defeat tax liability for dischargeability purposes.
Petersen v. United States, Dep't of the Treasury (In re Petersen) (Bankr. S.D. Fla.,
See ¶ 2.4(i)(9).
√ 2. Advising client to withdraw bank accounts and hide assets until the bankruptcy is filed –
fraudulent transfer. See ¶ 2.4(i). In re Gagow, 590 B.R. 517 (Bankr. Nev., 2018).
Held, the debtors engaged in a fraudulent transfer justifying denial of discharge when they withdrew over $64,000 from money market and deposit accounts with the admitted intent to hinder creditors. In re Bernard, 96 F.3d 1279 (9th Cir. 1996)
Debtor willfully evaded taxes by transferring stock and royalty interests to domestic and off-shore entities.
In re Sommers, 209 B.R. 471 (Bkrtcy.N.D.Ill. 1997).
Chapter 7 debtor engaged in willful attempt to evade or defeat tax where did not merely fail
to pay taxes but transferred assets to live-in companion without consideration, with intent to
protect assets subject to levy; willful attempt to evade tax may include any conduct the likely
effect of which would be to mislead or - conceal. In re Griffith, 210 B.R. 216 (S.D.Fla. 1997).
√ 3. Relying on verbal or telephonic representations made by taxing authority.
See ¶ 7.5(c).
Matter of Larson, 862 F.2d 112 (7th Cir. 1988) (taxpayers were not entitled to rely on IRS agent's
erroneous misrepresentation that taxes would be discharged in a bankruptcy filed less than 240 days after assessment).
Similar ruling In re Howell, 120 B.R. 137 (9th Cir. BAP 1990).
√ 4. Failing to consider tolling events (primarily prior bankruptcy or offer-in-compromise) on discharge time periods.
See ¶ 2.8. Failing to include 90-day add-on pursuant to 11 U.S.C. § 507(a)(8)(A)(G+).
And see possible tolling of the 2-year period based on “equitable tolling” discussed at ¶ 2.9(c)(2).
√ 5. Failing to consider extensions to file tax return in calculating the three-year rule.
See ¶ 2.8(a).
√ 6. Mistake - putting client in Chapter 13 to “wait out” the priority periods. See ¶ 2.8(b).
√ 7. Failing to obtain the basic tax transcripts. See ¶ 7.1.
√ 8. Mistaking code “150” on the transcript for date taxpayer filed his own return.
See ¶ 7.7(b)(9).
√ 9. Failure to examine the Account Transcript for clues that the return may have been an IRS
substitute for return. See ¶ 7.7(b)(9).
Clues for Substitute for Return (“SFR”):
√ No $ amount shown for “Tax Per Return”
√ No $ amount shown with “150”
√ Letters “SFR” appear with Code “150”
√ Form 1040A” appears at upper left corner
√ Code “599” appears (but could be the taxpayer’s 1040)
√ 10. Assuming “SFR” on transcript rules out a taxpayer filed return; taxpayer may have
filed his/her 1040 later that could be deemed a valid return. See ¶ 2.4(f)(3)
√ 11. Incorrect calendar calculation of the three time periods; Debtor’s counsel filed the
bankruptcy just one day short of the satisfaction date for the 3-year time rule.
Elkins v. IRS 369 B.R. 741 (Bankr. S.D. Ga. 2007). See ¶ 2.4(d) et. seq.
When in doubt consider using an online bankruptcy transcript analysis service
However, such a service may not be able to correctly determine calendar times in the
case of a serial filer, or case where new bankruptcy period overlaps prior bk filing.
When calculating the 3-year period, failing to consider when due date for return may
land on weekend or holiday. Where April 15 lands on a weekend or holiday, due date
1982). See ¶ 2.4(e).
√ 12. Wrong assessment date for state taxes. Date of assessment as to state income tax
may be nebulous; verify when the assessment is “final.” In re King 122 B.R. 383 (9th
Cir. BAP 1991). See ¶ 2.4(G)(5).
Example; In California, the Franchise Tax Board date deemed the assessment date is
the “posting” date. See ¶ 2.4(g)(4).
√ 13. Filing proof of claim for unsecured priority taxes that do not violate any of the § 523
rules in Chapter 13. May be a mistake.
See ¶ 2.10(b), ¶ 3.6, ¶ 3.6(f)
√ 14. Failing to file proof of claim for secured tax claim in Chapter 13. Mistake.
See ¶ 2.10(b), ¶ 3.6(f)(3), (5)
√ 15. Failure to scrutinize tax proof of claim filed in Chapter 13 - usually incorrect (IRS
often claims entire tax is secured if a lien is recorded, ignoring the actual value of the
See ¶ 2.15(c)(2), ¶ 3.11(g)(6), ¶ 8.12(k).
√ 16. Failing to file proof of claim in Chapter 7 for nondischargeable taxes with nonexempt
assets. Mistake. See ¶ 6.10(b) In re Higgins, 29 B.R. 196 (Bankr. N.D. Iowa, 1983)
√ 17. Failure to explore state tax law requirement that taxpayer file a “report” or amended
return where IRS assesses additional taxes.
See ¶ 2.4(f)(20). Report is probably a required “return” under BAPCPA. § 523(a)(1)(B).
√ 18. Overlooking trustee’s power to avoid or subordinate a tax lien on the debtor’s (estate’s)
property and liquidate the asset to pay unsecured creditors. Applies in chapter 7 only.
See ¶ 6.11(b). In re Selander, 592 B.R. 729 (Bankr. W.D. Wash., 2018); In re Christensen,
561 B.R. 195 (Bankr. Utah 2016); Mukamal v. Citibank N.A. (In re Kipnis), 555 B.R. 877 (Bankr. S.D. Fla., 2016).
√ 19. State “sales” taxes may be dischargeable, either as excise taxes or as income
taxes, if assessed only against the retailer, not the customer.
See ¶ 2.7(g). 11 U.S.C. § 507(a)(8). Rosenow v. State of Ill., Dept. of Revenue, 715 F.2d
277, 10 B.C.D. 1332 (7th Cir., 1983); In re Calabrese, 689 F.3d 312, (3rd Cir., 2012).
√ 21. Giving improper notice. Listing wrong address for IRS on the schedules: should
normally be centralized IRS Insolvency Office, not the service center or district office.
√ 22. In Chapter 7, failure to request release of lien for discharged tax where equity in debtor's property is nominal.
See ¶ 2.4(j); ¶ 6.1(k); ¶ 6.12.
√ 23. Failure to verify validity of assessment in connection with 240-day period.
See ¶ 2.4(g); 6.8(f)(7).
Are the assessments valid?
Assessed during previous bankruptcy (pre-1994)?
Has client signed a waiver of the statute of limitations on assessment?
Is there any other event that extended the statute of limitations?
√ 24. Failure to determine if on-going IRS audit may result in additional federal tax, or
subsequent state “piggy-back” assessment.
The “sleeping assessment.” See item no. 28, below. See ¶ 2.4(g) and ¶ 7.10(b)(12)(ii)
√ 25. Failing to determine whether liens are valid; See ¶ 6.6 et seq.
For example, was a pre-1994 assessment or lien done during a prior bankruptcy thus
making it void? Was the lien filed in the wrong county? Has the lien expired?
(good for ten years from date of assessment of tax, plus applicable tolling events. If a
tolling event, IRS must refile the lien before a total of ten years has expired from date of
Junior to other liens? Invalid or inadequate name or address of taxpayer? Based on
Problem - tax lien on retirement plan. Can client outlive life of lien?
State liens - rules of validity may be different (e.g., California – must record with Sec. of
State to be valid against personal property, and is treated as a civil judgment
(may be avoidable if impairs exemption?)
SOURCE: John Balian.
Unlike IRS tax lien, state tax lien may not be effective against personal property unless
recorded in a central state office; in Cal. the lien must be recorded in the office of the
Secretary of State as well as the county of taxpayer's residence.
State tax lien may be avoidable where IRS lien is not; in CAL an FTB lien for personal
income taxes may be avoidable because state law treats tax lien as an ordinary judgment
Cal. R & T Code 2191.4.
See 11 U.S.C. § 524(a).
√ 26. There may be a second transcript for same client in IRS files - look for asterisk on social
security number on the tax transcript.
See ¶ 7.8. IRS Non-Master File section - (888) 829-7434
Particularly if debtor is divorced, widowed, or filed separately. Request the “non-master
file” transcript for both social security numbers. If the regular account transcript shows
no liability, it is probably on the other spouse's account transcript, or the non-master file
√ 27. Tunnel vision (looking only at IRS, or in the alternative, only at the state tax
situation). Focusing only on the tax years or tax periods your client seems most
Tip: when requesting the account transcripts “bracket” the transcripts - request the year
before the first year of liability, and the first year following the most recent year of liability.
√ 28. Failure to advise client about potential “sleeping assessments.”
See ¶ 2.4(9).
1. For IRS: Sleeper: no. 1
Tax Year meets the three-year rule;
Tax assessment meets the 240-day rule;
Tax return filed more than two years ago, but less than three.
Problem: the original tax for this year is dischargeable, but the statute of limitations
to audit this year has not expired (three years from date tax return was filed): IRS has right to
come back and audit this year after the bankruptcy, and may assess additional taxe which would not be
discharged in the bankruptcy.
2. For state taxes: Sleeper no. 2
Failure to check subsequent state tax assessment following discovery of a
Subsequent IRS assessment on the transcripts. Taxpayers frequently forget about
the state taxes following an IRS audit.
See ¶ 2.4(g)(8). ¶ 2.4(g)(10)s
√ 29. Failure to verify that tax lien that has been satisfied in Chapter 13 plan has been
released following discharge. See ¶ 2.15(d)(1); ¶ 6.5.
√ 30. Interest on the tax may be wrong. If a priority or non-dischargeable tax is going to be
paid out of liquidated assets or through a plan, it might be prudent to double-check
the interest that the taxing entity claims has accrued; it is not unheard of to find an
error. There is software available for this, or a local enrolled agent or accountant may
know how to check the interest. See ¶ 3.13.
√ 31. NOL. If the client's business has lost money recently making the client eligible for a
net operating loss (NOL) adjustment to his next year's taxes, and there will be non-
exempt assets to be liquidated by the estate, the trustee may claim the NOL to reduce
the estate's taxes, resulting in deprivation of the benefit of the NOL to the client. If
such an event seems possible, the client needs to be forewarned.
See ¶ 2.18(b).
√ 32. Failure to warn client about personal liability for accrued postposition interest on non-
dischargeable taxes and trust-fund taxes, even if tax claims are to be paid in full through
chapter 13 plan. ¶ 3.13(a)(3), ¶ 3.13(a)(6). In re Widick, No. 10-40187 (Bankr. D. Neb.
2019); In re Thaxton (Bankr. S.D. W.Va., 2017).
√ 33. Not getting precise figures for tax, interest and penalties early on in a chapter 13; if not
straightened out early in the case so that monthly payment will be sufficient to pay it
off within the life of the plan, the trustee may file a surprise motion to dismiss just
months before completion on the basis that the claims cannot be paid off within 60
√ 34. Treating a tax lien on an ERISA retirement plan as a secured claim in chapter 13; weight
of authority is that lien on property that is not property of the estate is not a secured
claim in bankruptcy. In re Bailey (Bankr. Me., 2018)
See ¶ 3.15(c)(2); See ¶ 6.5(b)(4).
√ 35. Forgetting to explore whether statutes of limitations for collection may have expired or
are near expiration, before doing discharge analysis. In some cases the statute will have
expired or is near expiration, making the bankruptcy unnecessary. See ¶ 2.15.
√ 36. When reviewing the effect of the tax liens, not looking at the priority (i.e. seniority) of
tax lien filing dates - State may have filed before the IRS, thus IRS may be unsecured,
or vis-versa. See ¶ 6.4.
√ 37. Substituting in on a filed case in progress. Taking a case over after filed by the client
pro per, or filed by another lawyer - Don't assume prior attorney knows what he was
doing. Do assume there are hidden mistakes that will come back to bite you.
√ 38. Failure to get client to sign release of liability in a rush filing case where you don't
have time to do a thorough case investigation.
See author's example, Appendix.
√ 39. Missing possible defense; it may be argued that post-petition community property is
immune from debts of other spouse discharged, or dischargeable in prior bankruptcy;
convoluted text of § 524(a)(3). In re Field, 440 B.R. 191 (Bankr. Nev., 2009).
See ¶ 6.13(g)(7).
√ 40. Another possible defense; spousal transmutation agreement may protect non-filing
spouse's income and property from non-dischargeable tax debt of the other spouse.
¶¶ 6.9(d)(9); 6.13(g)(7); Internal Revenue Manual § 22.214.171.124 (06-05-2017) - Effect of
Marital Agreements on Collection. But may be nullified if technicalities are not
Assuming a marital-property divorce decree assigning tax liabilities to the respective
spouses binds the IRS as to whom they can go after for the whole liability. As a
general rule the IRS is not bound by the provisions of such agreements assigning tax
payments to one spouse. In re Cooper, 83 B.R. 544, 17 Bankr. CT. Dec. 276 (Bankr. C.D.
√ 41. Date of IRS assessment is not when a tax court judgment is entered, but after 90-day -
appeal period has expired. See ¶ 2.4(g)(2). In re Williams 183 B.R. 43 (Bankr.E.D.N.Y. 1995)
√ 42. Is the client a partner or shareholder in a partnership, joint venture, or corporation that is
being audited, or that may cause the client to be personally assessed for business entity
income or taxes?
Will the client’s filing bankruptcy automatically dissolve the partnership? Check with the
client’s tax professional. ¶ 2.4(g)(10), ¶ 2.17.
√ 43. In a chapter 7 case to be filed this year – debtor has non-exempt assets and non-
dischargeable taxes – if he/she fails to file an election to split the tax year it is possible
all of the tax debts will be deemed post-petition liabilities, and hence will receive no
dividend from the non-exempt assets. Client should consult his/her tax professional.
In re Higgins, 29 B.R. 196 (Bankr. N.D. Iowa, 1983). See ¶ 2.15(b).
√ 44. “Equitable tolling.” Prior bankruptcy may toll the two-year period prescribed at § 523(a)(1)
(B)(ii). Putnam v. Internal Revenue Serv. (In re Putnam), 503 B.R. 656 (Bankr.
E.D. N.C., 2014); Ollie-Barnes v. Internal Revenue Serv. (In re Ollie-Barnes) (Bankr.
M.D.N.C., 2014); In re Spinks, 591 B.R. 113 (Bankr. S.D. Ga., 2018). See ¶ 2.9
√ 45. Failure to consider the late-filed return issue. A tax return not filed on time (for the IRS,
April 15 or October 15); is it a valid tax return for bankruptcy purposes? Same for state
Failure to consider this issue in circuits outside the 1st., 5th. And 10th circuits;
notwithstanding that other circuits have not adopted McCoy, some individual judges in
other circuits have adopted the McCoy test.
Some examples; Judge Thomas L. Perkins, Shinn v. Internal Revenue Serv. (In re Shinn)
(Bankr. C.D. Ill., 2012) – 7th Cir; Erik P. Kimball, Judge; Wendt v. United States (In re
Wendt), 512 B.R. 716 (Bankr. S.D. Fla., 2013) – 11th Circ; Ben Barry, United States
Bankruptcy Judge, Kline v. Internal Revenue Serv. (In re Kline), 581 B.R. 597 (Bankr. W.D.
Ark., 2018) – 8th Cir..
√ 46. Improper allocation of taxpayer’s funds seized pre-petition, or as setoff. i.e.
the debtor designated the money go to non-dischargeable tax years, but IRS allocated
Setoff. ¶ 2.15
√ 47. Failure to consider effect of Code section that provides, upon confirmation of the Chapter
13 plan, the property revests to the debtor: Does this allow the IRS to do collection on
those assets, under the argument that property released from the estate is no longer
protected by the automatic stay? It may be prudent to provide in the plan that the property
is retained by the estate. 11 U.S.C. § 1327(b).
√ 48. Failure to file motion to impose or extend the automatic stay.
In the event the debtor is a serial filer, particularly if he/she had one or more prior cases pending within
the preceding year, the automatic stay may commence on petition date,
but expire in 30 days if the debtor does not obtain an order extending the stay pursuant
to 11 U.S.C. § 362(c)(3)(A), or not arise at all pursuant to. Discussed at ¶ 2.9(c)(2).
The issue may be complicated if prior bankruptcy stays overlapped. Nachimson v. United
States ex rel. Internal Revenue Serv. (Bankr. W.D.Oka. 2019);
It may not be clear whether or not the IRS has violated the stay.
In re Janice L. Elrod, Debtor 523 B.R. 790 (Bankr, W.D. Tennessee. 2015).
√ 49. Failure to give proper notice; wrong IRS address in the schedules; What may have been dischargeable
taxes were not discharged in debtor's chapter 13 because notice to the IRS was given at an improper address.
Markley v. Dep't of Treasury (In re Markley) (Bankr. N.D. Ohio, 2017).
See ¶ 5.1(b).
√ 50. In the 1st, 5th, or 10th circuits, where taxpayer filed a late tax return thus triggering the "McCoy test," the
taxes and interest will be non-dischargeable, but the McCoy rule does not apply to the penalties; the discharge
of penalties is governed by 11 U.S.C. § 523(a)(7) and does not depend on whether a tax return was filed.
√ 51. Assuming incorrectly that, in a chapter 7 case, that the IRS cannot levy, postpetition, on the debtor’s ERISA or
other similar retirement plan for prepetition taxes, despite the automatic stay.
The automatic stay prevents IRS levy only on property of the estate; the automatic stay does not apply to property that is
not property of the estate. Hence, an IRS levy that commenced before or after the chapter 7 is filed, may continue on a
taxpayer’s retirement plans containing anti-alienation clauses (such as an ERISA). Gross v. Commissioner, (CA 9th Cir., 2/25/2014) 113 AFTR 2d ¶ 2014-529. Similar ruling, In re Wilson, 206 B.R. 808 (Bankr. W.D. N.C. 1996).
Held, IRS could levy on debtor's postpetition income because the income was not property of the estate, In re Ballard, 238 B.R. 610 (Bankr. M.D. La 1999), In re Smiley, 189 B.R. 338 (Bankr. E.D. Pa. 1995). pparently contrary, In re Reisbeck, 505 B.R. 546 (Bankr. Mont. 2014).
√ 52. Treating a lien for tax penalties as secured. The IRS or state taxing agency sometimes files a proof of claim listing the
entire tax liability as secured, which presumably includes the portion for the penalties. This may arise where the taxing
entity has recorded a lien for the liabilities.
However, the majority rule is that penalties should not be deemed secured, notwithstanding a valid tax lien
which includes the penalties has been filed. The rationale is, typically, that to do so would punish the general unsecured
creditors for the debtor's bad conduct (whatever it was that triggered the penalty).
See, e.g., In re Merwede, 84 B.R. 11 (Bankr. Conn. 1988); In re Brentwood, 134 B.R. 267 (Bankr. M.D. Tenn. 1991);
In re Quality Sign Co. Inc. 51 B.R. 351 (Bankr. S.D. Ind. 1985).
© MORGAN D. KING 2019 2020
 Derived from King’s Discharging Taxes in Consumer Bankruptcy Cases, available at TaxPublishing.com (morganking.com).
 There are several that do well with calendar arithmetic, but the author uses taxhelpsoftware.com.