Gregory Mitchell | TaxConnections

13 Apr 2022

Passport Revocations Under Section 7345

One of the little-known tools in the IRS collection tool belt is the ability to revoke a taxpayer’s passport where the taxpayer has a “seriously delinquent tax debt.”

Congress passed Section 7345 in 2015. In certain situations of unpaid tax, the statute authorizes the IRS to certify that debt to the State Department for action. The State Department generally will not issue a passport to a taxpayer after receiving such certification from the IRS. The State Department may deny a taxpayer’s passport application or even revoke a current passport.

What Tax Debt Qualifies?

The IRS certifies “seriously delinquent tax debt” to the State Department. “Seriously delinquent tax debt” is an individual’s unpaid, legally enforceable federal tax debt (including interest and penalties) totaling more than $55,000 (adjusted yearly for inflation) for which: (1) A notice of federal tax lien has been filed and all administrative remedies under the law have lapsed or have been exhausted; or (2) A levy has been issued.

Written by Gregory Mitchell | Posted in IRS Notice CP508C • IRS Section 7345 : Passport Revocations

13 Jan 2022

IRS Summonses And The Collection Of Unpaid Taxes

This post focuses on the recent case of Polselli, et al. v. IRS, Case No. 21-1010 (6^th Cir., January 7, 2022).

The recent Sixth Circuit’s recent opinion in Polselli, et al. v. IRS, Case No. 21-1010 (6^th Cir., January 7, 2022) addresses notice requirements with respect to the issuance by the Internal Revenue Service (“IRS”) of administrative summonses. In pursuit of over $2 million in unpaid liabilities, the IRS issued administrative summonses to the banks of the wife of the taxpayer – Remo Polselli (“Taxpayer”) – and his lawyers. The IRS did not notify the Taxpayer of the summonses, relying on applicable provisions of the Internal Revenue Code (“IRC”) excluding summonses issued “in aid of the collection” of tax assessments from its notice provisions. These recipients filed suit seeking to quash the summonses. Ultimately, the 6^th Circuit affirmed the District Court’s opinion, concluding that the summonses were issued in aid of the IRS’s collection efforts and that the Taxpayer was not entitled to notice.

Relevant Facts

Written by Gregory Mitchell | Posted in IRS Collections

24 Aug 2021

Innocent Spouse Relief Explained: Tax Relief For Spouses

A topic that we frequently see in the Tax Clinic that I run, one that is often misunderstood, is that of innocent spouse relief.

Generally, the purpose of providing innocent spouse relief is to, as one court put it: “protect one spouse from the overreaching or dishonesty of the other.” Purcell v. Commissioner, 826 F.2d 470 (6th Cir. 1987). But many people that come into the clinic think that it means that, if the other spouse earned the income, then they are automatically entitled to innocent spouse relief when the appropriate amount of tax does not get paid. And that is simply not the case.

As I always do with my students, the place to start is the Internal Revenue Code, and the primary section we’re looking at as it relates to innocent spouse relief is Section 6015 – “Relief from joint and several liability on joint return.” So Section 6015 starts with the lead-in of “Notwithstanding Section 6013(d)(3)”, so let’s start our analysis there:

Written by Gregory Mitchell | Posted in Innocent Spouse Relief

03 Aug 2021

Recent Bankruptcy Court Ruling Addresses The Jurisdiction of Bankruptcy Courts To Hear Innocent Spouse Relief Cases

The recent case of In re Bowman, Case No. 20-11512, Section A (Bankr. E.D. La., July 12, 2021) addresses an interesting intersection of tax and bankruptcy law. Specifically, it looks at the issue of whether bankruptcy courts have jurisdiction to grant a debtor relief as an “innocent spouse” under § 6015 of the Internal Revenue Code, and ultimately determines that it does.

Although it is true that Section 6015(f) does not allow a bankruptcy court to exercise initial subject matter jurisdiction over an innocent spouse defense because only the Secretary of the IRS receives the equitable power to grant innocent spouse relief under that Section, in this case, it was undisputed that the Debtor sought such relief from the Secretary in July 2019 and the Secretary denied the request. The bankruptcy court determined that § 6015(e)(1)(A) confers subject-matter jurisdiction to determine whether innocent spouse relief should be granted when it is denied by the Secretary. Citing to Pendergraft v. I.R.S. (In re Pendergraft), Adv. No. 16-3246, 2017 WL 1091935, at *3-4 (Bankr. S.D. Tex. Mar. 22, 2017), the Court explained:

Written by Gregory Mitchell | Posted in Bankruptcy And Taxes • Innocent Spouse

15 Jun 2021

Bankruptcy: The Mechanics of Exemptions and Related Issues

Most bankruptcy attorneys have a basic level of understanding of the how exemptions work. At a very broad level, a claim of exemptions removes property of a consumer debtor (note that business debtors are not afforded exemptions) from the bankruptcy estate and thereby serves as a foundation for the “fresh start” that bankruptcy is designed to provide.

But I suspect that even seasoned bankruptcy attorneys – including myself – lack a detailed understanding of many of the nuances of the mechanics of exemptions unless they’ve been faced with issues related to the claiming of exemptions. A recent case has prompted a “back to the basics” look at the mechanics of exemptions.

Written by Gregory Mitchell | Posted in Bankruptcy Exemptions

20 Apr 2021

Discharging Taxes In Bankruptcy – United States v. Helton

The recent case of United States v. Helton, Case No. 20-5686 (6^th Cir., 2021) addresses the dischargeability of taxes under 11 U.S.C. § 523(a)(1)(C). The dischargeability of taxes is a somewhat complicated maze of Bankruptcy Code provisions that requires a little bit of analysis.

The Code starts with a general rule that taxes are not dischargeable. See 11 U.S.C. § 523(a)(1).

However, taxes may be dischargeable if three tests can be met. Those tests are summarized as follows:

The 3-year test;
The 2-year test; and
The 240-day test.

3-year test

Written by Gregory Mitchell | Posted in TaxConnections

15 Apr 2021

Are You A Consumer Debtor Or A Business Debtor?

The issue of whether a debtor is a “consumer debtor” or a “business debtor” occasionally comes up in an individual debtor’s bankruptcy case. First of all, why does it matter? And the answer is that, in certain cases, this determination can make all the difference in determining whether the debtor can ultimately get a chapter 7 discharge.

The issue revolves around the “means test” in bankruptcy. Simply put, the means test looks at a debtor’s income to determine whether that particular debtor’s income is above or below the “mean” income for other debtors in a similar situation – i.e., the same geographic region and the same number of dependents.

Written by Gregory Mitchell | Posted in Bankruptcy

06 Apr 2021

Taxes and Bankruptcy: Taxes In Bankruptcy Case

In re Minor; 127 AFTR 2d 2021-XXXX (DC CA); Case No. 2:20-cv-03626 (DC, C.D. CA)

This case involves taxes in a bankruptcy case that were priority taxes under the Bankruptcy Code.

The Debtor in this case filed for Chapter 7 bankruptcy in May, 2013 and received a discharge in May, 2015. In March, 2018, the IRS filed an amended proof of claim in the bankruptcy case for almost $26 million for unpaid federal income taxes owed by Minor for tax years 2007, 2008, 2009, and 2011 (the “IRS Claim”). The IRS Claim consisted of a secured claim of $24,857,210.48, a priority claim of $997,869.07, and an unsecured claim of $61,398.90.

The California Franchise Tax Board (“FTB”) also filed its own proof of claim, the details of which were not relevant for purposes of this case. What was relevant was that the bankruptcy trustee did not have enough funds to pay both the IRS and the FTB claims in full. Therefore, the bankruptcy trustee (“Trustee”), the IRS, and the FTB entered into a stipulation regarding the division of available funds (the “Stipulation”).

Written by Gregory Mitchell | Posted in Freeman Law • Taxes And Bankruptcy

24 Mar 2021

Bankruptcy Exemptions, Pension Plans, And Section 409A

This post covers the recent case of In re O’Malley, 127 AFTR 2d 2021-XXXX (DC IL) (March 2, 2021).

In this case, the Debtor failed to disclose a retirement plan in his initial bankruptcy schedules in a case originally filed in March, 2013. At the creditor meeting, the Debtor disclosed the existence of an interest in a MetLife defined benefit pension plan, and committed to amending his schedules to include that interest. Subsequently, the Debtor did in fact amend his schedules to list a single “Met Life Defined Benefit Pension Plan” of “Unknown” value and proceeded to claim 100% of its value as exempt from the estate under an Illinois law that protects pension benefits. Following the conclusion of the creditor meeting, neither the Trustee nor any creditor objected to the exemption claimed by Mr. O’Malley for the pension plan disclosed in the amended schedules.

Written by Gregory Mitchell | Posted in Bankruptcy Exemptions • Pension Plans • Section 409A

31 Dec 2020

James And Simona Quezada v. Internal Revenue Service – The Fifth Circuit And The Discharge Of Taxes In Bankruptcy

The dischargeability of and the ability to collect taxes by the IRS in a consumer bankruptcy case often turn on the issue of whether and when the taxpayer filed the relevant returns, thereby determining when the statute of limitations on assessment began to run. In this case, the IRS assessed the taxpayer, James Quezada, in 2014 for tax deficiencies arising for tax years 2005-2008. Quezada filed for bankruptcy in 2016. The IRS filed a claim for the alleged 2005-2008 tax deficiency. Over the taxpayer’s objection, the Bankruptcy Court held that the limitations period never began to run because Quezada never filed “the return,” and the District Court affirmed. As a result, the taxes were deemed not dischargeable, and the IRS’s claim was upheld.

Written by Gregory Mitchell | Posted in Discharge of Taxes In Bankruptcy