IRS Do-Over?

[Imalawman]

So, I got a client's debt discharged in bankruptcy. (well, very long story, but the IRS agreed to discharge the debt) So the account was cleared and he was showing a zero balance. Then I get a call from an IRS attorney who was calling to tell me that he was going to inform the IRS not to discharge the debt. I told him that he was too late and weeks ago, the debt was released and abated from the computers.

He then said he was going to reinstate the liability and I said, "you can't do that". He said, "I think I can". I said, "I'll sue you then." I asked for the statutory authority to reinstate a liability where the IRS had made a determination and released the debt. He didn't know and is going to get back to me. Have any of you ever heard of this? I had not up until this point. Thanks for the feedback.

[Dr. Caligari]

Do you have an order of the Bankruptcy Court discharging the debt?

[Imalawman]

Do you have an order of the Bankruptcy Court discharging the debt?

Just a general discharge, not a specific discharge (I didn't handle the bankruptcy, I got involved after the fact)

[Judge Roy Bean]

I have seen something similar before in a Chapter 13. The IRS filed a proof of claim for taxes and penalties for three prior years (which the debtor contested and submitted copies of returns). The IRS, even with the extended period to respond, failed to. The proof of claim was denied and the couple later emerged with a successful discharge but the IRS systems kept sending them letters every year until, with some suggestions from the folks 'round here, I suggested they get the Ombudsman's involved and things were straightened out.

[Quixote]

So, I got a client's debt discharged in bankruptcy. (well, very long story, but the IRS agreed to discharge the debt) So the account was cleared and he was showing a zero balance. Then I get a call from an IRS attorney who was calling to tell me that he was going to inform the IRS not to discharge the debt. I told him that he was too late and weeks ago, the debt was released and abated from the computers.

He then said he was going to reinstate the liability and I said, "you can't do that". He said, "I think I can". I said, "I'll sue you then." I asked for the statutory authority to reinstate a liability where the IRS had made a determination and released the debt. He didn't know and is going to get back to me. Have any of you ever heard of this? I had not up until this point. Thanks for the feedback.

Since when does a creditor get to decide which debts are or are not discharged in bankruptcy?

Is the IRS attorney saying the debt was not discharged or is he saying that IRS has decided not to abandon its lien for the discharged debt?

[The Observer]

Is the IRS attorney saying the debt was not discharged or is he saying that IRS has decided not to abandon its lien for the discharged debt?

A very good question and perhaps there exists a matter of confusion in regards to how discharges work in connection with exempt property and discharges.

Was this a Chapter 7 no-asset? Did the taxpayer claim exempt property? This may be the reason why IRS counsel want to re-instate the assessment.

[Prof]

A quick observation. Under 11 USC sec. 523 (a), taxes which are not dischargeable are automatically non-dischargeable, without reference to pleadings, findings of the court, etc., and the IRS is not even required to file a proof of claim.

On the other hand, if a debtor wants to discharge taxes allegedly non dischargeable (say a false/fraudulent return), the debtor can file to ask the court to determine that the tax he or she owes is not within the described taxes which are automatically non-dischargeable.

In the alternative, the debtor and the IRS can enter into an agreed order allow the IRS claim in an agreed amount and referecing the balance as discharged/waived, etc.

Once an actual order is entered, which could include a provision in a Plan under 11, 12 or 13, the Service would be bound, like any other creditor.

So, with the debt that is automatically not discharged, like taxes, child support, alimony/spousal support, etc., the creditor can "decide" to sit on its rights, and it is up to the debtor to bring that dispute to the court.

[Imalawman]

So here's the answer to this dilemma -

So the bankruptcy took place, general discharge order. I thought that the tax debt was dischargeable. I worked with the Bankruptcy section of the IRS for over a month and a half. They agreed with me and discharged the debt and the Client's tax account had a zero balance. During this time there was a pending tax court case in regards to this tax debt. Once the balance was zeroed out, I filed a motion to dismiss based on mootness.

At this point, the IRS attorneys were pissed off that they weren't going to get their pound of flesh so they dug into the matter and produced evidence that the assessment date that both the bankruptcy section and I were using was wrong and was 10 days later, which missed the 240 day rule by 6 days. They then re-assessed my Client.

My question to this forum was could they do that once they had cleared it from their end and zeroed out the taxpayer's account. Answer - Yes. but in my opinion, its a very shady thing to do - and they were so GD smug about it too, that it just pissed me off. Really changed my attitude about the IRS and how they work. (fortunately, I didn't file the bankruptcy petition or I'd be contacting my malpractice insurer) I would love to challenge the GCM that the IRS' position is based on, but my client didn't want to pursue that matter. We have dismissed the tax court case and are working an OIC.

My lingering questions are this:

1. Since they had to re-assess the tax debt, shouldn't the whole time periods start over? Shouldn't we now be able to contest the underlying tax debt (which deadline the client missed the first time)?

2. Aren't they subject to the SOL for assessment of a tax? (in this case there is the underpayment 6 year rule in effect, so it does me no good, but the question remains) I say that it does. Otherwise, the IRS could always change their mind - unless, of course, there was a written agreement or settlement.

I just think once the IRS makes a determination, they should honor it. Instead they want to act as if there are no repercussions for their mistakes. As I said, it has left a bad taste in my mouth with the IRS and I'll never trust the tax court attorneys again.

[The Observer]

1. Since they had to re-assess the tax debt, shouldn't the whole time periods start over? Shouldn't we now be able to contest the underlying tax debt (which deadline the client missed the first time)?

What makes you think that the IRS re-assessed the tax? What if they instead reversed the abatement? Have you ordered a copy of the transcripts to see exactly what they did?

2. Aren't they subject to the SOL for assessment of a tax? (in this case there is the underpayment 6 year rule in effect, so it does me no good, but the question remains) I say that it does. Otherwise, the IRS could always change their mind - unless, of course, there was a written agreement or settlement.

If the abatement was reversed, I would argue that the original assessment is intact and therefore the question of the assessment statute is moot.

[Prof]

You should consider re-opening the case and see if the bankruptcy judge will enforce the agreement reached with the Service. However, since the agreement was reached by mutal mistake, and the agreement was probably not announced/ordered, given your recitation of the facts, I think the OIC is probably the best result. However, if the IRS entered into an agreed order of discharge, why isn't that enforceable by the bankruptcy court? Good luck.

[Imalawman]

1. Since they had to re-assess the tax debt, shouldn't the whole time periods start over? Shouldn't we now be able to contest the underlying tax debt (which deadline the client missed the first time)?

What makes you think that the IRS re-assessed the tax? What if they instead reversed the abatement? Have you ordered a copy of the transcripts to see exactly what they did?

2. Aren't they subject to the SOL for assessment of a tax? (in this case there is the underpayment 6 year rule in effect, so it does me no good, but the question remains) I say that it does. Otherwise, the IRS could always change their mind - unless, of course, there was a written agreement or settlement.

If the abatement was reversed, I would argue that the original assessment is intact and therefore the question of the assessment statute is moot.

The problem is that there really is no "abatement reversal" authorized by statute. Sure, the underlying debt hasn't gone away - but the enforcement arm abated that assessment - its gone. I argue that there is no statutory authority for the IRS to say, "whoops! do-over". What they might be able to do, and the IRS attorney agreed with me, is reassess the underlying tax debt that didn't go away.

If you can produce a statutory authorization for reversing an abatement (which I really don't ever think makes sense) then I'd be thrilled to see it. The IRS can't just sit there forever with the ability to reverse an abatement. Otherwise there would never be finality to a large number of transactions with the IRS (those that weren't pursuant to a written agreement). It is a re-assessment of the underlying debt. I argue that the statutory limitations would then apply.

I understand that the IRS thinks that they are reversing an abatement. I just don't think they can actually do that. Nor do I think it makes logical sense. Once something is abated - it is done. Final. The only means of creating another legally enforceable tax debt is to re-assess the existing tax debt. If you can produce statutory authority, you'd be the first. The only legitimate argument is that the underling tax debt wasn't extinguished by the abatement and can still be assessed. And I would LOVE to sue the IRS over that position. In my opinion, abating a tax debt, then saying, "oop's we take that back" is bulls--t and illustrative of the fact that IRS has no idea what is going on between departments right now. Everyday, I encounter one branch of the IRS saying one thing only to be contradicted by someone else. Come on, get your act together!!

The IRS seems to think they live in a fairy world where they can do whatever they want because they control the computer system. Sometimes they forget that they are bound by law. Simply because they can override an abatement on the computer system doesn't mean that they can legally do that. Well, you can see that this experience has really steamed my clams and I got apologies for it from several IRS people. Still, I'm pissed as hell about it. I'm sure I'll get over it in a year or two. I'm just afraid that my perception of the IRS has forever changed.

[Omne35]

I would say that unless you received an actual written order of some type abating the tax, simply zeroing it out on their system isn't legally significant. Internal bookkeeping entries aren't binding.

[The Observer]

I would have to agree given the fact that you mentioned that the error about the assessment day was made by the court and the taxpayer's counsel - not the IRS.

And I don't agree that an error regarding an abatement means that the IRS has to give up the assessment. Sure, they may lose postion on the seniority of the federal tax lien (since other creditors may be harmed relying on any releases recorded by the IRS), but why should the IRS be punished and the debtor rewarded simply because of clerical error? The taxpayer knew (or their counsel should have known and advised their client) that the debt was owed. I am not convinced that they should benefit from their own error.

However, none of that answers my first question: Did you secure a copy of the IRS transcripts to show exactly what happened regarding the "re-assessment" of the tax? Sometimes it helps to start at the beginning and not start from the middle.

[Imalawman]

However, none of that answers my first question: Did you secure a copy of the IRS transcripts to show exactly what happened regarding the "re-assessment" of the tax? Sometimes it helps to start at the beginning and not start from the middle.

They appear as assessments on the transcripts. I understand the IRS point of view. Its just tough to take when you think you've settled a matter with the IRS, the transcript is zeroed out, everything is clear. Then someone you've never dealt with gets involved and undoes everything without so much as discussion on the issue. Very frustrating and frankly makes me question all my other resolutions with the IRS.

I don't buy that "internal accounting entry". Sorry, but the IRS is the branch of government responsible for enforcing the US tax debts. When they clear your account and release the liens, I think that has a legal consequence. The IRS released their assessment. Accounting entries have an effect and I think a legal effect. This isn't Microsoft making a simple journal entry. This has very serious consequences and has legal consequences as well. For instance, once the tax account is cleared and the assessment abated, the IRS no longer has the right to lien or levy - that has a legal effect. Sorry, that argument doesn't go anywhere. Even the IRS counsel didn't pursue that one.

I think the IRS is probably right though, they can re-assess a tax debt that hasn't been legally disposed of through bankruptcy or a written agreement with the taxpayer. (I would love to get a judge to hear my arguments though) however, when they do re-assess the tax, that has legal consequences as well.

btw-Obs, I'm arguing more from a academic perspective now since I can't justify spending my client's money arguing this point in his situation. So how his transcript appears is of little relevance to me now. However, I think this is a really interesting legal question and one that I very well may see again. So, I'm 50% bitching and 50% wondering what Quatloosians think about this.