A retired Alaska Supreme Court Justice believed bankruptcy would rid him of his unwanted tax bill. It didn't.

 

After Justice Roger G. Connor had failed to pay $65,000 in taxes, the Internal Revenue Service filed a lien on his assets. Wanting to protect his $4,350 monthly pension, he filed for bankruptcy. The court, as it usually does, discharged his unsecured debts. Free at last, his former honor thought.

 

But no C the IRS insisted it could collect the back taxes out of retirement checks. It agreed bankruptcy protected future income and future acquired assets. But, it said, the checks come from his pension, an old asset.

 

The IRS had put a lien on that before bankruptcy. A lien is a security interest, like the mortgage company's security interest in your home. In both, the creditor is protected even in bankruptcy.

 

The court agreed with the IRS . So the pension checks went to the IRS until the debt was paid.

 

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Thomas M. Haas didn't pay taxes for nine years. He filed his returns -- but omitted a check.

 

The Internal Revenue Service said enough is enough.

 

Conventional wisdom says file a return even if you're broke, to avoid a penalty for failure to file. But can you do this for nine years?

 

Haas had the money; he just never used it to pay taxes. When he mailed returns, he didn't explain why he failed to include money. When the IRS noticed, it took him to court where he received a one year suspended prison sentence and five-years probation. It then sent him a tax bill for $705,000.

 

The IRS then waited for Haas to pay. He didn't. Instead, he filed bankruptcy to get his debts, including the tax bill, discharged.

 

Whoa C Haas C said the IRS . Where there's fraud, taxes are not forgiven. Fraud means an attempt to evade taxes by recording false book entries, keeping more than one set of books, hiding assets or other misleading or concealing conduct.

 

Haas said he did none of those things.

 

In a surprising final decision, the Court of Appeals allowed the tax cancellation. It said there was no indication of fraud: Haas didn't file false or misleading returns. He was not deceptive or dishonest C C just a debtor. Being in debt is not fraud.

 

Also surprising is the IRS ' procrastination. Normally, it would have swooped down on Haas right after the first, second or at least the third year. It would have grabbed most of his income and used liens to tie up his assets.

 

THE MORAL: Some silent souls simply slip through the crack.

 

PLANNING: As the two cases show, bankruptcy doesn't protect assets when there is fraud or where the IRS has already filed a lien. It also doesn't discharge recent taxes. For more information see IRS Collections at www.taxfables.com