Ex-Spouse’s Defense for Tax Discharged in Bankruptcy

Published Categorized as Bankruptcy Tax, Federal Income Tax, Innocent Spouse Relief, Marriage & Divorce Tax, Tax, Tax Procedure
Ex-spouse’s Defense For Tax Discharged In Bankruptcy
Ex-spouse’s Defense For Tax Discharged In Bankruptcy

What if an ex-spouse who is jointly liable for the tax waits until after the other ex-spouse’s bankruptcy discharge and argues that the taxes were not discharged in bankruptcy as the tax return was invalid?  The court addressed this in Kuhl v. United States, No.?05-6570-BK (2nd. Cir. 2006).  

Facts & Procedural History

Ms. Kuhl owed the IRS approximately $100,000 in taxes. Because the taxes were sufficiently old and a tax return was filed, Ms. Kuhl decided to file bankruptcy to discharge or eliminate the IRS tax liability.

After the bankruptcy proceeding was closed, the IRS imposed a wage levy to garnish Kuhl’s wages to satisfy the then discharged tax debt.

The taxpayer then attempted to work with the IRS to get it to recognize that the taxes were discharged in bankruptcy.  

The Tax Return in Question

The IRS took the position that Kuhl’s timely filed tax return was not sufficient to count as a tax return.  It based this argument on Ms. Kuhl’s then ex-spouse claim that he never signed the joint filed tax return.

It appears that the IRS pursued this argument because the IRS statute of limitations to collect this tax debt had expired.  The IRS may also have pursued this argument as it was  unsuccessful in trying to collect from Mr. Kuhl or Mr. Kuhl may have pursued innocent spouse relief for himself with the IRS.  

Reopening the Bankruptcy Case

But Ms. Kuhl was correct in this case.  Her liability for the taxes was discharged in bankruptcy.  

Ms. Kuhl then had to reopen the bankruptcy proceeding to have the bankruptcy court enter an order declaring that the tax liabilities were in fact discharged.  

The IRS initially appealed the discharge.  The court did not buy the IRS’s invalid tax return argument.   

The litigation then focused on whether the IRS attorneys were subject to sanctions and had to pay the taxpayer’s attorneys fees, given that the government had violated the law in trying to collect a discharged tax debt. 

Failing to Sign a Tax Return as a Defense

This presents an interesting defense for an ex-spouse who is jointly liable for a tax debt.  It would seem that the non-signing spouse could raise this issue strategically in an effort to get the IRS to collect from the signing spouse.   

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