This month we want to discuss the concept of "tolling." There are several types of events that serve to stop the clock on various time periods that determine when an income tax becomes dischargeable:
- A prior bankruptcy case. The filing of a bankruptcy case will toll both the rule that a tax must be more than three years past its due date to be dischargeable in bankruptcy (the "3 year rule") and the rule that a tax must have been assessed for more than 240 days to be dischargeable in bankruptcy (the "240 day rule")
- An request for a due process hearing or an appeal of a collection action taken against a debtor. The same rules apply.
- An offer in compromise. We recently wrote about offers in compromise, which are offers to compromise (or settle) a tax debt for less than the full amount due. The submission of an offer in compromise will toll the 240 day rule. If the taxpayer makes an offer in compromise within 240 days of filing for bankruptcy, the 240 day time rule will be suspended for the time during which the offer in compromise is pending, plus an additional 30 days.
- Tax litigation. Litigation with taxing authorities in U.S. Tax Court or other venues will toll both the 3 year rule and the 240 day rule.
- A request for an extension of time to file a tax return. Filing for an extension will: (a) delay the start of the 3 year rule to the extended due date; (b) delay the start of the rule that a tax is not dischargeable in bankruptcy until more than two years from the filing date (the "2 year rule") until the actual filing date; and (c) delay the start of the 240 day rule until the tax is actually assessed.