I had to dredge this tidbit from memory last week when we were looking over the tax transcript for a client who had been audited by the IRS and assessed a whopping tax bill. To his good fortune, that newly assessed tax will be dischargeable 241 days after the audit assessment. But, I asked, had he reported the results of the IRS audit to our state income tax authority? “No,” he said. “Why?”
Because state law requires the report of an assessment of taxes by the feds to trigger the statute of limitations on the state tax. Until the newly assessed tax is reported to the state, the statute does not begin to run. So while the federal income tax may be dischargeable in 241 days, the mirror image state tax remains assessable.
So follow the breadcrumbs through the Bankruptcy Code with me. Section 507(a)(8)(A)(iii) defines as a priority taxes which are not assessed prepetition but are assessable by applicable law or agreement. Section 523(a)(1) makes priority taxes non dischargeable. California state law makes the unreported additional tax imposed by audit assessable until a point after the state tax folks learn about it.
You can see the operation of these statutes in FTB v Jerauld, 208 BR 183 (9th Cir. BAP) and Maryland v. Ciotti, 638 F.3d 276(4th Cir. 2011).
Note that the priority tax definition also includes taxes that remain assessable “by agreement”. Standard operating procedure for taxing authorities who are in discussion with a tax payer about a tax issue is to “request” that the taxpayer sign an extension of the period in which the taxes can be assessed. The alternative, the taxpayer is told, is an immediate assessment.
Note here that just getting the IRS tax transcript here and finding the audit assessment does not get you the next, essential piece: the report, if required under the law of your state, to the state taxing authorities. You have to question the debtor or his tax professionals til you are satisfied that you’ve got good information.
Image courtesy of hekkeller.