Summary:
If you can't work a deal with IRS, see if the bankruptcy court will discharge taxes.

The IRS said T. W. Izzo owed more than $600,000. He disagreed, saying he owed only $155,872. Now he says he doesn't owe anything--and he's right.

Six years earlier, the IRS realized Izzo hadn't filed returns for the previous seven years, so it filed for him. He then filed returns showing the lower amount.

Two years and three months later, he filed for chapter 7 bankruptcy. In Chapter 7 you give all your assets except exempt ones--like clothes-- to the court, and it sells the assets to pay creditors. Some income taxes are discharged; some aren't.

Generally, a taxpayer can avoid paying an income tax debt by filing for bankruptcy only if:

• The taxes were due (including extensions) more than three years before filing bankruptcy.
  
• Taxpayer committed no fraud.
  
• The IRS doesn't have a lien on property for the taxes.
  
• The taxpayer filed the return more than two years before the bankruptcy.
  

The IRS said the returns Izzo filed didn't qualify as returns because he filed them after the agency filed his returns. And the IRS substitute returns didn't qualify either. Thus, taxes for these seven years were not discharged, said the agency. Taxes for recent years weren't in issue.

Even if forms are properly prepared and signed, they may not qualify as a return. To qualify, they must also show an honest attempt to comply with the law.

The IRS argued Izzo's returns serve no purpose because they just show his desire to reduce taxes.

If his returns had shown a higher tax than the substitute returns, the agency said, they possibly would serve a tax purpose.

The court disagreed saying Izzo's returns showed an honest attempt to comply with tax laws. Indeed, the agency had accepted the returns and reduced Izzo's taxes. That indicates the IRS itself considered the returns an attempt to comply. The court discharged his unsecured debts, including taxes for the seven years.

(more at IRS Collections)