Many Tax Professionals know that 1040 Income taxes can be discharged in a bankruptcy once certain rules are adhered to. But what happens to your client after a bankruptcy is filed? Does the IRS contact the client or his attorney? Does the IRS show up at Court? Does the IRS send out any confirmation letter that the taxes are discharged?
When a taxpayer (“Debtor”) files bankruptcy the Court issues a date for a 341 Creditor’s Hearing (“341″). At that Hearing the Creditors have a right to ask the Debtor questions regarding the debts being discharged as well as what did the Debtor do with the money or assets he had prior to filing. Although, Creditors have a right to attend the 341, Creditors seldom attend. As a general rule, I never see the IRS at a 341. In the hundreds of Chapter 7 Bankruptcies I have filed, to discharge taxes, the IRS never has shown up at the 341. The IRS’ position is the tax is either dischargeable or not dischargeable. Their attendance at the 341 will not have a bearing on the dischargeability.
What is required before attending the 341?
Before the 341, the Debtor must provide the Trustee with the Debtor’s last filed tax return. There is no requirement that the last filed tax return be the current year return. Just recently, I provided a Trustee with a copy of a Debtor’s 2009 return on a current bankruptcy filing. I did this because the Debtor had not filed a return since 2009. The Trustee accepted the 2009 return since it was the last filed tax return.
Who is the Trustee? The Trustee is an arm of the federal government. It is the Trustee’s position to see if there are any assets that he or she can grab and sell for the benefit of the creditors. Many times the Trustees are attorneys or CPAs.
The 341 Hearing:
The Debtor needs to bring a Government issued photo id and a social security card to the 341. Most Debtors bring a driver’s license. A current passport will also work. The Government issued photo can be federal or State.
The Debtor must bring their social security card to the 341. If they don’t have one they need to go to the local Social Security Office and get a temporary card for the 341. Otherwise, they will be told to come back on another date if they can’t get a temporary card on the day of the 341. In one case, I used an honorable discharge from the Army to prove the Debtor’s social security number. Not the best option but in that case, my client was unable to obtain a replacement social security card because of immigration issues.
Debtor’s didn’t always have to bring a social security card. This changed a number of years ago as a result of Identity Theft. Prior to the implementation of this procedure people were filing bankruptcy for someone other than themselves or the individuals showing up at the 341 were not the Debtors who filed the bankruptcy. These tactics have largely now stopped.
Most Debtors are surprised how many people are at the 341. There are usually about 30-40 people at the 341. The majority are other Debtors who also have their 341 at the same time. The IRS will not likely be there for your client. Eventually, the Debtor is called up to the front of the room to speak to the Trustee.
The 341 interview last about 5 minutes. When the Debtor is called up to the Trustee’s desk, Trustee will ask the Debtor as series of questions. In generally those questions are:
- Did the Debtor review the Bankruptcy Petition before signing it?
- Is all information on the Bankruptcy Petition correct?
- Does any of the information have to be amended?
- Did the Debtor list all of his assets?
- Has the Debtor sold any of his assets for less than fair market value in the last 2 years (or 4 years depending on the State)?
- Does the Debtor receive alimony or child support?
- Is the Debtor due a refund for the current year’s return (These refunds can be seized if not protected by certain exemptions).
After these questions are answered and the Trustee is satisfied with the answers the Debtor is excused.
After the 341 the Debtor generally receives his discharge papers in about 3 or 4 months. The Notice of Discharge will be sent out to all the Creditors listed in the Bankruptcy Petition. At this point the taxes are discharged. There will be no notice or letter received by the IRS. The IRS will not call the Debtor’s attorney to advise that the taxes have been discharge. The Bankruptcy Court will not issue any communication that specifically states the taxes are discharged.
If your client wants proof of dischargeability the Debtor can file a Complaint in the Bankruptcy proceeding confirming the discharge of the taxes. Most lawyers and their clients do not take this option. It is up to the Debtor if he wants to take this extra step. It is an extra cost. The taxes are discharged whether or not this step is taken if the rules for discharging taxes were followed prior to filing the Bankruptcy.