The Department of Revenue recently sent a Notice of Final Assessment to my client who is in bankruptcy. Why? Is this not a violation of the U.S. Bankruptcy Code?
An assessment (either preliminary or final) which is entered by the Department against a bankrupt taxpayer is entered in order to establish the amount of a bankrupt claim with the Bankruptcy Court and it is a notification to the taxpayer of the amount of taxes owed to the state. If the taxpayer feels that the amount assessed is incorrect, the taxpayer should contact the Assessment Unit (334-242-1340) and explain their contentions and also provide any records which will substantiate their claim that the assessment is incorrect. Bear in mind that all jurisdictional time limitations for appeals must be adhered to. No. The entry of an assessment against a bankrupt taxpayer is not a violation of the Automatic Stay provisions of the U.S. Bankruptcy Code. (See U.S.C. Title 11 Section 362(9)(d).) This section provides for the making of an assessment of tax against a bankrupt taxpayer by a governmental unit. Assessments may be entered but the governmental unit cannot act to obtain possession of property of the bankruptcy estate. (See U.S.C. Title 11 Section 541 for definition of “property of the estate.”)
Related FAQs in Assessment Procedures, Business and License
Once the lien has arisen, it will continue until the liability for the amount assessed is satisfied, released or becomes unenforceable by reason of lapse of time (i.e. 10 years from the date the lien is filed) (Code Sections 40-1-2, 40-29-20, and 49-29-21).
No. A surety bond is not required at the time you receive the Final Assessment. However, if a sales tax balance remains due at the time the Final Assessment is no longer subject to appeal, you will be deemed non-compliant and be required to purchase and maintain a one-time surety bond for a two-year period. Pursuant to Section 40-23-6(c) (1), Code of Alabama 1975, as amended, the surety bond shall be in the amount of the actual sales tax liability for the three months immediately preceding the non-compliant period, but not less than twenty-five thousand dollars ($25,000). The Sales Tax Surety Bond (S&U:BOND) and Instructions for Executing the Sales Tax Surety Bond (S&U:BOND Inst) may be found on the Department of Revenue website at: alador.wpengine.com/forms.
In Peiffer v. Alabama Department of Revenue, 126 Bankr. 364 (1991), the Bankruptcy Court held that the Alabama sales tax constitutes a “trust fund” tax and as such is not dischargeable in bankruptcy pursuant to 11 U.S.C. Section 507(a)(7)(c). A “trust fund” tax is a tax which is levied directly on the consumer and required to be collected by the merchant and reported to the state.
A tax lien is effective against other creditors after a Notice thereof has been filed by the Department of Revenue or other agency of the state or county in the office of the Judge of Probate of the county in which such property, real or personal, is located. (Section 40-1-2(b))
The Department may, at any time, release all or any portion of the property subject to the lien from the lien or subordinate the lien to other liens if it determines that the taxes are sufficiently secured by a lien on other property of the taxpayer or that the release or subordination of the lien will not endanger or jeopardize the collection of such taxes. A certificate by the Department to the effect that any property has been released from the lien or that such lien has been subordinated to other liens is conclusive evidence that the property has been released or that the lien has been subordinated as provided in the certificate. If any lien imposed by Sections 40-1-2 and 40-29-20 has been satisfied and a Notice of the Lien had been recorded by the Department pursuant to Section 40-1-2(c), the Department shall issue a release of the lien (40-1-2(d)) to the person against whom the lien was claimed. The Department shall record the lien release in any county where the original lien was recorded and in the office of the Secretary of State if applicable.
By filing a Notice of Tax Lien, the Department is notifying the public that the state has a claim against your client’s property, including property that may be acquired after the date the lien is filed. A lien may harm your client’s credit rating. A lien was recorded because your client had neglected or refused to pay taxes owed to the Department of Revenue. (See Code Sections 40-1-2 and 40-29-20.)