How to Beat the IRS: Dischargeability of Taxes in Bankruptcy
By Daniel C. Fleming, Esq. 
With a few exceptions, the Bankruptcy Code adheres to the age-old rule that in life, only death and taxes are certain. It isn’t so easy to beat the IRS because the Bankruptcy Code significantly limits a debtor’s ability to discharge taxes in bankruptcy.  A bankruptcy professional has to have an intimate understanding of the Bankruptcy Code in order to know when you can beat the IRS and when you can’t. Your starting point should be an understanding as to when a discharge of a tax is permitted. 
Beating the IRS in bankruptcy court can sometimes feel like asking the San Diego Padres to beat the New York Yankees. The IRS has very low hurdles to clear in order to make a tax debt stick around. First, the IRS must show that the tax is of the kind that can’t be discharged.  The type of tax, the date the tax was assessed, the date it was due, whether it is a tax or penalty and other factors are all relevant. Second, the IRS must prove this only by a preponderance of the evidence,  which is lawyer talk for “maybe I’m right, and maybe I’m wrong.” The IRS must also demonstrate that the claim is for either a tax or tax penalty. The Bankruptcy Code does not define what is a “tax” and just because Congress or a local legislature called it a tax does not necessarily mean it is a tax. 
I. Priority and Gap Period Taxes:  The “Wait Three Years After Filing the Return or 240 Days After Being Assessed” Rule.
The Bankruptcy Code gives certain kinds of taxes a priority status for distribution. These are called priority taxes and are non-dischargeable. Also, taxes in an involuntary bankruptcy case between the date of the petition and either a trustee’s appointment or an order for relief are also non-dischargeable.  Priority taxes are the type of taxes that are most commonly not discharged. Understanding the nuances between which taxes are priority and which ones are not will help you beat the IRS.
The Bankruptcy Code has seven categories of taxes that are priority.  None of them is dischargeable.  These are the times that you will not beat the IRS. But, where the exceptions to discharge are time-limited, you will need to wait the requisite amount of time. Where there is no time limit, you will need to figure out how to pay it. The seven categories are:
A. Income Taxes where more than three years have passed since the return was filed or where more than 240 days have passed since the taxes were assessed.  In order to beat the IRS on income taxes, you will need to wait the three years after the return is filed or 240 days after the tax is assessed, whichever is later, in order to discharge the tax liability.
One debtor failed to notify the California Franchise Tax Board of an IRS revenue agent’s report within 90 days. This was required under California’s tax law. As a result, the State of California’s time to assess a tax deficiency expanded from six months to four years. The taxes were still properly assessable when the debtor filed bankruptcy, so the taxes were found non-dischargeable. 
B. Property Taxes that were due more than a year ago.  In many places, property taxes are liens on property, so that while you may personally discharge your property taxes that are more than one year old, you may still have to pay off the liens if you wish to keep the property.
C. Trust Fund or Withholding Taxes.  Just pay them. You won’t beat the IRS on these types of taxes.
D. Employment Taxes where the return was due more than three years ago.  In order to beat the IRS, you will need to wait the three years before filing bankruptcy. However, you need to remember that the employment taxes that are not dischargeable are the employment taxes on compensation earned from the debtor.  One pair of debtors owned a company that owed unemployment insurance taxes. Although these taxes were primarily the company’s responsibility, they were themselves responsible persons, so they were also liable on these taxes. However, the Bankruptcy Code provision limits the priority and non-dischargeability to taxes on compensation earned from the debtor. Since the company’s employees earned their pay from the company and not the debtors, the debtors could discharge the unemployment taxes. 
E. Excise Taxes where the return was due more than three years ago or where the events happened more than three years ago.  Another three years of anxious waiting before filing bankruptcy. One debtor was a trucker, and so incurred motor carrier taxes under Oregon state law. The court decided that these taxes were excise taxes because they were exacted for a public purpose, instead of some individual benefit to the payer.  As a result, the taxes were not dischargeable.
F. Customs Duties where the good entered the country more than a year ago, unless the customs officers are investigating your shipment to assess duties or do not have enough information to appraise or classify your shipment, in which case the time limit is four years.  Therefore, if the customs officer holds up your shipment, you need to wait four years. Otherwise, one year is all you have to wait.
G. Penalties Related to Priority Taxes.  If you didn’t avoid the other kinds of priority taxes, then you are also going to get stuck with the penalties for not paying them when you were supposed to.
II. Late-Filed or Unfilled Returns:  The “Be Sure You Always File Your Returns On Time” Rule
You won’t be able to discharge taxes if you haven’t filed your return or if you filed late, less than two years before filing bankruptcy. However, if more than two years have passed since you filed the return, even though it was late, and the tax is not otherwise a priority tax, then you can discharge the tax and beat the IRS. 
One court said that not knowing about a tax is no excuse for not filing a return (ignorance, it seems, is only an excuse for the IRS!) The debtor did not know that wagering taxes existed or that such taxes required returns, so he didn’t file any. He was a bookie, and the IRS told him that there was a tax on the business of wagering. The IRS hit the trifecta with this bookie, assessing $1.5 million in taxes plus penalties and interest. After filing bankruptcy, the debtor asked the court to discharge the taxes. Since he didn’t file any returns, the debt was non-dischargeable. 
A substitution for a return prepared by the IRS doesn’t count as a return filed by the debtor unless it is signed by the debtor. The tax would not be discharged in that case. One debtor failed to file tax returns for three consecutive years. The IRS prepared “substitutes for returns” for those years, as it is permitted to do so,  but the debtor didn’t agree to them and didn’t sign them either. After filing bankruptcy, the taxes were not discharged. The court noted that the prepared substitute for return must be signed by the taxpayer before it can be accepted as the taxpayer’s filed return. 
A tax return is deemed filed when the IRS receives it. Normally, this is the date the Post Office, like the IRS a federal agency, receives it.  One debtor, however, chose to file by private courier service, on a Monday. Two years minus two days later, he filed bankruptcy. The debtor argued that since the date exactly two years before his bankruptcy filing was a Saturday, that Saturday deadline should be adjusted to the following Monday. This way, he could say that his return was filed two years before the bankruptcy and discharge the taxes.  The Court didn’t buy that argument and would not make the adjustment.  He could have beaten the IRS if he had waited another two days before filing. The moral of this story seems to be that you should go postal if you want to beat the IRS.
Neither the IRS nor the debtor may manipulate the two-year period. The IRS or any taxing authority cannot convert a dischargeable tax into a non-dischargeable tax claim by requiring successive amended returns for the same information.  Once a debtor has filed a return at the appropriate time disclosing all income, the return has been filed for purposes of the Bankruptcy Code. One debtor was required by Georgia state law to file an amended state tax return if the taxpayer’s federal tax liability changed. This debtor didn’t file the amended return before filing bankruptcy. The State of Georgia argued that the tax was non-dischargeable because the amended return was not filed. The Court opined that once a debtor has filed an initial return, it is deemed filed even if successive or amended returns are required that address the same basic information. Otherwise, the IRS could render most taxes non-dischargeable by requiring successive returns. 
Similarly, a debtor may not use successive bankruptcy filing to convert a non-dischargeable tax into a dischargeable tax. The two-year period will be extended by the time during which the automatic stay was in effect in any bankruptcy case filed by or against the debtor that was terminated.  A pair of debtors, husband and wife, filed a Chapter 7 petition 29 months after filing tax returns.  Since this is more than two years, the debtors argued that the tax was discharged. Previously, however, only one month after filing the tax returns, the debtors had filed an earlier Chapter 13 petition. Although the Chapter 13 petition was dismissed just four months later, the two-year period was tolled for both the time the automatic stay was in effect, plus the six months mandated by the Internal Revenue Code. 
III. Fraudulent Returns and Willful Attempts to Evade Taxes:  The “Be Sure You Always File Your Returns On Time” Rule, Part II, and The “Be Honest in Your Tax Affairs” Rule, also known as the “Do Everything Above Board Except Write the Check Unless You Can Afford It, In Which Case You Should Write the Check” Rule
The Bankruptcy Code makes a tax not dischargeable if the debtor filed a fraudulent return or willfully attempted to evade the tax. The filing of a fraudulent return or a willful attempt to evade a tax renders the tax non-dischargeable no matter how old the tax. A return is fraudulent if the debtor knows that the return is false, intends to evade the taxes, and fails to pay the taxes.  The IRS charged one debtor, an insurance agent, with substantially understating his income. Nevertheless, he was able to discharge most of his taxes because the IRS didn’t meet its burden of proof. The IRS had to establish, by a preponderance of the evidence, actual intentional wrongdoing by the debtor. In typical bureaucratic fashion, the IRS had inadvertently destroyed most of the relevant records. The court found the remaining evidence was inconclusive and could not find that the debtor intentionally took illegal deductions or knew that his returns were false. As a result, most of the tax liabilities were dischargeable and he beat the IRS. 
Fraudulent Returns. The courts use the civil fraud test that is used in federal tax cases  to determine whether a return is fraudulent.  No showing of “evil motive or sinister purpose” is required.  To determine whether a return was fraudulent (these are called “badges of fraud”), the courts consider whether there were large understatements of income made consistently over time, failure to keep adequate records, failure to file tax returns, implausible or inconsistent behavior by the taxpayer, concealing assets, failure to cooperate with authorities, and the illegal nature of the activity generating the income.  The IRS determined that one debtor underestimated his income by $365,237.29 in 1980 and $209,606.00 in 1981. This income came from the sale of phenyl acetone, an illegal substance used in manufacturing methamphetamine, also known as speed. The court found that this debtor had large discrepancies in income reported and that the income was derived from illegal activity. The debtor actually reported $9,000 in illegal income. This clearly demonstrated that he knew he had to report the income. After his indictment on drug charges, the debtor fled the country. The court construed this as an unwillingness to cooperate with authorities. The debtor also admitted to having bank accounts overseas, and the court construed this as concealment of assets. Given the weight of the evidence, the court found clear intent to file a fraudulent return. 
Willful Tax Evasion. A debtor’s attempt to evade or defeat the collection, payment, or assessment of a tax will render the tax non-dischargeable. Factors that courts will consider in looking for a willful attempt to evade a tax include: (1) willful concealment of assets; (2) fraudulent transfers; (3) conducting business affairs in a manner intended to make tracking or levying on income more difficult; (4) significant understatements of income; (5) repeated failure to file returns or habitually late filings in the wake of past compliance and governmental demands; (6) failure to cooperate with the taxing authorities; (7) filing false forms;  (8) statements indicating an intent to evade taxes; (9) criminal convictions for tax evasion; (10) inability to explain deductions and calculations of income; (11) involvement in “tax protester” activities; (12) failure to pay taxes despite the ability to do so and living a lavish lifestyle; and (13) implausible or inconsistent behavior on the debtor’s part.  Factors indicating that the failure to pay a tax was not willful include timely filing of accurate returns and cooperation with the taxing authority.  Nonpayment alone, however, is not proof of willful tax evasion.  Something more is required. 
One debtor who didn’t file tax returns and didn’t pay taxes thought poverty was a good defense. His excuse was that he did not have the money to pay the taxes, as well as the penalties and interest. He argued that he had not done anything affirmatively to evade taxes. The court, however, concluded that “willful” was the same as “voluntary, conscious, and intentional.” This included acts of both omission and commission. The court also noted that the debtor had the ability to file his returns and pay his taxes, so his taxes were held non-dischargeable. 
Whether a debtor willfully attempted to evade a tax is determined by considering all relevant facts. The fact that the debtor had no money is irrelevant, since he or she can at least file returns if not pay the taxes. One debtor did not file tax returns until late, even though he knew he was obligated to file and admitted that he had understated his income. He also deposited his paychecks in a girlfriend’s bank account. The court thus found ample evidence not only of stupidity, but also a willful attempt to evade payment of taxes, so this debtor lost to the IRS. 
The courts look at willful evasion in discharge cases the way they look at federal civil tax fraud cases and use the same test. This means that proof of willful tax evasion requires a showing only that the nonpayment or underpayment of a tax was “voluntary, conscious and intentional.” One debtor always filed his tax returns and always paid his taxes on time until one year when his income increased dramatically, as did his lifestyle. That year, he thought he could beat the IRS and did not file his returns and did not pay his taxes. He even arranged for his employer to make him an independent contractor. This way, he avoided withholding taxes from his paycheck. The court held that the debtor intentionally failed to file his returns and failed to pay taxes when he had the financial ability to pay them. The court also found that the debtor knew he had to file returns and knew he had to pay the taxes, especially when he had the money, and that this was sufficient to find that the debtor had voluntarily and intentionally evaded payment of taxes.  To demonstrate willfulness, the government has to show only that the debtor voluntarily and willfully didn’t do it.  The government does not need to show an affirmative act on the debtor’s part to prevail; a “culpable omission” is enough. 
However, another debtor was able to beat the IRS and discharge the tax liability, even though he intentionally failed to pay the taxes. He filed returns properly, but he used his income to pay personal and business debts instead of his taxes. Although he had the money to pay his taxes, he did not have enough to pay all his debts. The court felt that the debtor’s failure to pay taxes was not a function of dishonesty, but rather a function of not having enough money. The court ruled that the debtor’s knowing failure to pay taxes, by itself, was not a willful attempt to evade the tax. Otherwise, if the court followed the IRS’s arguments, almost no debtor in bankruptcy would ever discharge a tax, because they all have willfully failed to pay. Thus, this debtor was discharged of the tax. 
One pair of debtors consistently avoided taxes, but were ultimately not able to beat the IRS. They gave their money and land to their children. They created corporations that their children owned but that they still controlled. They paid off other creditors while failing to pay taxes. They lowered their own salaries in order to make less money available to the IRS. The court looked at the sum total of the debtors’ action and found that the debtors clearly were attempting to avoid paying their taxes and that the attempts were voluntary, conscious, and intentional. 
Another couple had a long history with the IRS before filing bankruptcy and did not beat the IRS after bankruptcy, either. The debtors underreported their income from 1974 to 1979, then did not file any returns from 1980 to 1983. In 1975, they moved all of their property into a trust and tried to transfer all of their income to the trust. However, the tax court ruled that the income was still taxable to them as individuals. The IRS then looked to distributions from the debtor’s company, and then to his social security payments on prosperities owned by the trust. The debtors never voluntarily paid taxes. The court noted that while mere non-payment was not enough to deny discharge, failure to pay was part of what the court would consider to determine whether the debtor willfully attempted to avoid or defeat taxes. The non-payment would have to be combined with a failure to file tax returns or measures to conceal assets or income for the tax to be non-dischargeable. The court concluded that these debtors had gone far beyond merely not paying their taxes. 
There was also a debtor that tried to argue that attempts to conceal assets were not attempts to evade or defeat taxes so that the taxes would be non-dischargeable. He, too, lost to the IRS in the end. The court interpreted the Bankruptcy Code so as to include concealment of assets. The bankruptcy court had found that the debtor had willfully attempted to conceal his ownership interest in his condo and in a corporation that he organized. Both of these assets were in his wife’s name. The debtor had paid at least $60,000 of the condo’s $106,000 purchase price and testified that the condo was not a gift to his wife. Also, he did not convey the property to his wife until two years later, at about the time the tax assessments were made. The corporation in question was engaged in the oil reclamation business, which happened to be the debtor’s expertise, not his wife’s, even though she was supposed to be the owner of the company. Even though the wife testified that no expertise was necessary to run the business, the court didn’t believe her. The debtor was instrumental in starting the company and had done most of the work, yet the debtor held no stock and was not paid for his services. As a result, the court found that the debtor had acted willfully to conceal assets in order to evade or defeat taxes. 
Another pair of debtors, a surgeon and his wife, had a pattern of failing to file tax returns, failing to pay taxes, and attempting to hide income and assets. This was found to be a willful attempt to evade or defeat taxes. The debtors did not file tax returns for eight years and did not pay any taxes during that time. The IRS found that the debtors spent a lot of money during that time and that they deposited even more money into their own bank accounts and those of a charity. These facts showed income being earned, with no tax returns being filed. In the bankruptcy case, the courts found that the debtors willfully attempted to evade and defeat their tax liabilities. As a result, the IRS beat them, not the other way around. 
Another debtor filed false W-4 withholding statements so that his employers would withhold no money from his paychecks. This tactic was also not enough to beat the IRS. He didn’t file tax returns on time and didn’t pay his taxes. The court decided that the evasion of a tax liability was different from the evasion of a tax payment. Evading the tax payment was dischargeable because the debtor acknowledged the liability but simply couldn’t pay. This is the sort of honest debtor that the Bankruptcy Code is designed to help. Evading the tax liability was not dischargeable because of the measure of dishonesty involved. The bankruptcy system does not look kindly upon that kind of conduct. The court decided that the combination of the debtor’s conduct established a willful evasion of tax liability, non-dischargeable under the Bankruptcy Code. 
Still another debtor claimed to be a tax protestor. We all know that tax protesters never beat the IRS. He didn’t file any returns and didn’t pay any taxes, even though he had an income. He had heard about a group of tax protestors and attended their meetings in order to find out how not to pay taxes. The tax protesters gave him forms of documents to use in avoiding taxes, which he used. The court found that the debtor knew he had to pay taxes and to file tax returns. The court concluded that the debtor voluntarily and willfully violated these duties and declared the tax liability non-dischargeable. 
IV. Tax Penalties:  The “Wait Three Years to Get Rid of the Penalties” Rule
You can beat the IRS and discharge tax penalties in two circumstances. Either the penalties have to do with dischargeable taxes or the events that created the penalties happened more than three years before the bankruptcy. 
Most courts looking at this issue have ruled that a tax penalty in connection with an event more than three years before bankruptcy is dischargeable, even when it relates to a non-dischargeable tax. One pair of debtors was not able to beat the IRS in this respect. They had non-dischargeable tax liabilities, and the court ruled that the interest and penalties on those non-dischargeable tax liabilities were likewise non-dischargeable. 
Another pair of debtors failed to file income tax returns and the IRS assessed taxes, penalties and interest. Five years later, they filed a Chapter 7 bankruptcy. The court ruled that since the penalties were imposed with respect to a transaction or event that occurred more than three years pre-petition, the penalties were dischargeable. They, too, beat the IRS on the penalties. 
In still another case, the IRS had established that the underlying taxes were non-dischargeable because of the debtor’s fraud. The penalties related to those taxes, however, were analyzed separately. Since the penalties in question met the criteria, the penalties were dischargeable and the IRS lost again. 
In yet another case, although the debtor filed bankruptcy in 1992, at issue were the taxes for 1982 through 1987. The taxes were found non-dischargeable, but the penalties were dischargeable, however, because of the way the Bankruptcy Code provisions were drafted, even though this created the anomaly of discharging the penalties while not discharging the taxes and interest. 
V. Debts Incurred to Pay Federal Taxes:  The “Don’t Borrow the Money to Pay Your Taxes From Only One Source” Rule
The Bankruptcy Code doesn’t allow you to discharge a debt that you incurred in order to pay a federal tax that would have been non-dischargeable if you still owed it after filing bankruptcy.  The policy underlying this provision is to encourage people to lend money to debtors so that they can pay their taxes, even if payment requires a loan or the use of a credit card.  However, as one commentator noted: “in practice, it may prove difficult to trace…loan proceeds as payment for taxes.”  It seems then, that given the difficulties in beating the IRS outright, that you should pay the IRS and try to discharge the debts you didn’t pay because you paid the IRS.
VI. Interest on Non-Dischargeable Tax Claims:
The “You Are Stuck With the Interest” Rule
You won’t be able to discharge the interest if the related taxes are non-dischargeable taxes. For example, one debtor had non-dischargeable tax liabilities, but contested whether the interest on those liabilities was dischargeable. The court agreed with most of the other courts that had ruled on this issue and decided that the interest was non-dischargeable. 
Interest accruing before the bankruptcy filing on a non-dischargeable tax is also non-dischargeable. One Chapter 13 debtor provided for priority payment of pre-petition tax liabilities, but not for pre-petition interest on those tax liabilities. Under the Bankruptcy Code,  interest is an integral part of an allowed claim, so the interest has the same priority as the actual tax. The interest thus has priority status,  and is also not dischargeable.   Another court followed the same reasoning in a Chapter 7 case. 
VII. Limited Applicability of Section 523(a) in Chapter 13 Cases:  The “Chapter 13’s Not Such a Bad Idea Unless You Have Priority Taxes” Rule
According to Chapter 13 of the Bankruptcy Code, only certain exceptions to discharge apply to a Chapter 13 case, provided that the debtor makes all of the payments in the Chapter 13 case and that the debtor makes all of the payments in the Chapter 13 plan.  This results in a greater discharge for the debtor.  None of the applicable exceptions noted is related to taxes, so that all taxes would be discharged upon completion of all payments under the plan must be made, and Chapter 13 requires that all priority claims be paid in full under the plan.  As a result, all taxes enjoying priority will have to be paid in full under a Chapter 13 plan before a discharge is granted.  However, the other exceptions to discharge that were discussed earlier, except for the priority taxes, do not necessarily have to be paid in full in order to obtain a discharge.
Thus, in Chapter 13 cases, taxes are dischargeable even if not paid in full, unless the taxes fit into one of the priorities. One debtor was found in an earlier Chapter 7 filing to have willfully attempted to evade his tax obligations, so the tax liability was ruled non-dischargeable. He later filed a Chapter 13 case. Under Chapter 13, only a few specified types of debts are non-dischargeable. Taxes related to tax evasion are not among them. Thus, the debtor was entitled to a discharge after completion of all payments under the Chapter 13 plan and was able to beat the IRS. 
VIII. Limited Applicability of Discharge Exceptions in Chapter 11 Cases:  The “You’re Not Really Better Off in Chapter 11” Rule
The exceptions to discharge have only limited applicability in Chapter 11 cases. Although Chapter 11 generally discharges all debts upon confirming a plan of reorganization,  Chapter 11 explicitly applies the exceptions to discharge to individual debtors in Chapter 11 cases, even if the plan is confirmed. 
One individual Chapter 11 debtor was assessed tax deficiencies after the bankruptcy case already commenced. The court reasoned that an individual Chapter 11 debtor cannot be discharged of the debts enumerated in the Bankruptcy Code, including those taxes that are afforded priority status.  As discussed earlier, priority taxes include taxes that are not assessed but still assessable as of the petition date.  Thus, the debtor was not discharged of the tax liability.  Being in Chapter 11 did not help him beat the IRS.
The same is not true for a corporate or partnership debtor. For corporations and partnerships, the exceptions to discharge do not apply at all.  To confirm a Chapter 11 plan, the Chapter 11 debtor has to pay priority claims, including priority tax claims. The priority tax claims have to be paid within six years.  The Chapter 11 debtor does not necessarily have to pay non-priority taxes or other claims in order to meet the bare minimum legal requirements for confirmation, although the parties may agree to different treatments for such claims as a practical matter.  Thus, corporate and partnership debtors in Chapter 11 can discharge the same claims a debtor can discharge under Chapter 13 without necessarily making full payment.  This would include all of the exceptions to discharge that were discussed earlier, except for the priority taxes.
Copyright 1999 © Wong Fleming, P.C.
 The author is a partner of in the law firm of Wong Fleming, P.C., with offices in Edison, New Jersey; Philadelphia, Pennsylvania; and New York, New York.
 Sections 523(a) and 507(a) of the Bankruptcy Code. References to “Sections” in these materials are made to the Federal Bankruptcy Code, Title 11, United States Code, and not to the Internal Revenue Code. References to statutes other than the Bankruptcy Code are fully cited.
 Sections 523(a) of the Bankruptcy Code governs exceptions to the discharge of individuals under Chapters 7, 11, 12, and is partially applicable to Chapter 13 as well. Section 523(a) expressly does not apply fully in Chapter 13 cases, nor does it apply to the discharge of partnership or corporate debtors.
 The claim must meet the various requirements of Section 523(a) and, if applicable, Section 507(a)(8).
 In re Fegely, 118 F.3d 979, 982 (3rd Cir. 1997); Grogan v. Garner, 498 U.S. 279, 284-286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
 United States v. Reorganized CF&I Fabricators of Utah, Inc., 518 U.S. 213, 116 S.Ct. 2106, 2113, 135 L.Ed.2d 506 (1996). The Supreme Court defined a tax as a “pecuniary burden laid upon individuals or properties for the purpose of supporting the government” and a penalty as “an exaction imposed by statute as punishment for an unlawful act.” Id. The Supreme Court has defined a fee as a “charge levied by a government on something that bestows a benefit on the particular party that is not shared generally by other members of the public.” National Cable Television Ass’n v. United States, 415 U.S. 336, 336-340, 94 S.Ct. 1146, 39 L.Ed.2d 370 (1974).
 Section 523(a)(1)(A) of the Bankruptcy Code.
 Section 523(a)(1)(A) of the Bankruptcy Code provides that taxes of the kind specified in Sections 507(a)(2) and 507(a)(8) are non-dischargeable. Section 507(a)(2) refers to taxes the debtor incurs in an involuntary bankruptcy case between the petition date and the earlier of the appointment of a trustee or the entry of an order for relief, the so-called “involuntary gap period.” Section 507(a)(8) refers to taxes that are afforded priority status in terms of bankruptcy distribution.
 Section 507(a)(8) of the Bankruptcy Code.
 Section 523(a)(1) of the Bankruptcy Code. Only taxes for which the liability was actually incurred pre-petition are entitled to priority under Section 507(a)(8). However, under Section 502(i), if such a tax arises after the petition date, as in the case where the return or payment is due post-petition, the tax shall be deemed to have arisen before the petition date. In re Overly-Houtz Co., 57 B.R. 932, 937 (Bankr. N.D.Ohio 1986), aff’d, 81 B.R. 434 (N.D.Ohio 1987). Priority taxes enjoy the same level of priority, and if the debtor’s assets are insufficient to satisfy all priority tax claims, the claimants share the available distribution on a pro rata basis. 4 Collier on Bankruptcy, ¶507.10 at 507-41 (15th ed. 1997).
 Section 507(a)(8)(A) provides that taxes measured by income or gross receipts are entitled to priority if one of three alternative grounds are met. The first is if the return is last due, including any extensions, during the last three years before the petition date. The operative date is the date the return is due, not the date it is actually filed. 4 Collier on Bankruptcy, ¶507.10[a] at 507-60 (15th ed. 1997). The second is if the income tax was assessed within 240 days after the assessment, however, the 240-day reach-back period is extended for the time the offer was in effect, plus thirty (30) days. For example, if an offer was in effect for sixty (60) days, the 240-day reach-back period would be extended an additional ninety (90) days, and a tax assessed no more than 330 days before the petition date would have priority status. 4 Collier on Bankruptcy, ¶507.10[b][ii] at 507-64 (15th ed. 1997). Only written offers made after the assessment extend the 240-day reach-back period. In re Aberl, 78 F.3d 241, 243-244 (6th Cir. 1996). The third is if the taxes are still subject to audit as of the petition date, In re DiPaolo, 45 F.3d 373 (10th Cir. 1995); In re Fein, supra, 22 F.3d 651 (5th Cir. 1994), or are taxes for the tax year in which the petition was filed, In re Pacific-Atlantic Trading Co., 64 F.3d 1292, 1297 (9th Cir. 1995). It is unclear whether taxes for the year in which the petition was filed should be bifurcated into a pre-petition priority tax and a post-petition administrative expense. Compare Pacific-American Trading, Id., 64 F.3d at 1297 (bifurcation of claim not addressed) and In re L.J. O’Neill Shoe Co., 64 F.3d 1146, 1151 (8th Cir. 1995)(tax claim bifurcated).
 In re Vitaliano, 178 B.R. 205, 208-209 (9th Cir. BAP 1995).
 Section 507(a)(8)(B) provides that state and local property taxes that were due within the one year period pre-petition are accorded priority. As long as the tax is assessed pre-petition, it is accorded priority, even if it not payable without penalty until after the petition date. In re New England Carpet Co., 26 B.R. 934, 940 (Bankr. D.Vt. 1983). Property taxes for years commencing after the petition date, however, constitute administrative expenses under Section 503 and are not priority claims. In re Isley, 104 B.R. 673, 678-679 (Bankr. D.N.J. 1989). Section 362(b)(18), which permits a taxing authority to perfect a property tax lien post-petition, encourages taxing authorities to seek secured, rather than administrative status for property taxes. In the District of New Jersey, the status of property taxes for the year in which the petition was filed is determined by controlling state law. See Isley, id., at 677-678 (applying New Jersey law, court held that New Jersey property taxes for petition year are pre-petition lien claims). Other courts have pro-rated property taxes during the petition year between pre- and post-petition components. In re Bissonnet, Inc., 153 B.R. 455, 457 (Bankr. S.D.Tex. 1992).
 Section 507(a)(8)(C) provides that any tax the debtor was required to withhold or collect is accorded priority. The crucial element for this priority is that the tax be owed by a third party, but collected or withheld by the debtor. In re Groetken, 843 F.2d 1007, 1013 (7th Cir. 1988)(Illinois Occupation tax was not a trust fund tax, because debtor was not required to transmit funds collected from a third party). If the debtor owes the tax in the first instance, it is not a trust fund tax. Id, In re Reichert, 138 B.R. 522, 525 (Bankr. W.D.Mich . 1992)(FUTA taxes are not paid by employees and are not trust fund taxes). Trust fund taxes, therefore, include: income taxes and social security (or railroad retirement) taxes withheld from the debtor’s employees’ wages, United States v. Pepperman, 976 F.2d 123, 126 (3rd Cir. 1992); In re Palij, 202 B.R. 27, 31 (Bankr. D.N.J. 1996); In re Madia, 68 B.R. 11, 14 (Bankr. D.N.J. 1986); sales taxes collected from customers (but not those paid by the debtor on its own purchases), In re Shank, 792 F.2d 829, 933 (9th Cir. 1986); use taxes collected from customers, Rosenow v. Illinois, 715 F.2d 277, 282 (7th Cir. 1983); and excise taxes the taxpayer is required to collect from a third party, In re Fields, 926 F.2d 501, 503 n.3 (5th Cir. 1991), cert. denied, 502 U.S. 938, 112 S.Ct. 371, 116 L.Ed.2d 323 (1991).
Trust fund taxes are not subject to a reach-back limitation. They remain a priority tax until paid in full. In re Official Committee of Unsecured Creditors of White Farm Equipment Co., 943 F.2d 752, 755-757 (7th Cir. 1991), cert. denied, 504 U.S. 919, 112 S.Ct. 1292, 117 L.Ed.2d 515 (1992) (trust fund taxes unpaid in first bankruptcy were priority taxes in a subsequent case); In re LMS Holding Co., 149 B.R. 684, 686 (Bankr. N.D.Okla. 1993)(trust fund taxes of a debtor who transferred assets to a third party under a Chapter 11 plan were priority claims in subsequent bankruptcy of purchaser who assumed tax liabilities).
 Section 507(a)(8)(D) provides that employment taxes on wages, salaries or commissions identified in Section 507(a)(3) earned from the debtor pre-petition are accorded priority if the tax return for the wages, salaries or commissions is due within the three years pre-petition. These employment taxes are not to be confused with withholding or trust fund taxes. Wages, salaries and commissions include vacation, severance and sick leave pay. 11 U.S.C. §507(a)(3). The provision of Section 507(a)(3) limiting priority wages, salaries and commissions to those earned within the ninety (90) days of petition date does not apply to the Section 507(a)(8)(D) priority. In re Pierce, supra, 935 F.2d 709 at 714. The priority afforded under Section 507(a)(8)(D) covers the debtor’s share of FICA taxes, as well as the debtor’s state and federal unemployment tax liability. In re Pierce, 935 F.2d 709, 713 (5th Cir. 1991)(FUTA); In re Continental Minerals Corp., 132 B.R. 757, 758 (Bankr. D.Nev. 1991)(state unemployment taxes). Only taxes on wages earned by the debtor’s employees are accorded priority under Section 507(a)(8)(D). But see In re Ross, 122 B.R. 462, 465 (Bankr. M.D.Fla. 1990)(claims against debtor general partner for FUTA liability of partnership’s employees accorded priority).
 Section 507(a)(8)(D) of the Bankruptcy Code.
 Ndosi v. State of Minnesota, 950 F.2d 1376 (8th Cir. 1991).
 Section 507(a)(8)(E) accords priority to excise taxes on pre-petition transactions for which a return is due after three years before the petition date, or, if no return is due, which occurred during the three years immediately preceding the petition date. Courts have tolled the Section 507(a)(8)(E) reach-back for the time that the automatic stay from a prior bankruptcy proceeding by or against a debtor was in effect. In re Gurney, 192 B.R. 529, 539 (9th Cir. BAP 1996).
An excise tax has been defined as an indirect tax not directly imposed on persons or property, but one that is imposed on the performance of an act or the enjoyment of a privilege. New Neighborhoods Inc., v. West Virginia Worker’s Comp. Ins. Fund, 886 F.2d 714, 719 (4th Cir. 1989).
Excise taxes often resemble non-tax, non-priority fees, and attempts to distinguish between them have spawned a substantial amount of litigation. 4 Collier on Bankruptcy ¶507.10[a] at 507-76-507-77 (15th ed. 1997). Unfortunately, notwithstanding attempts to define excise taxes, litigation on what constitutes an excise tax still continues. Collier, id. There is general agreement, however, that excise taxes include sales taxes, estate and gift taxes, gasoline and special fuel taxes, wagering taxes, and truck taxes. 4 Collier on Bankruptcy ¶507.10 at 507-75 (15th ed. 1997), citing 24 Cong. H11113; §17430 (Sept. 28, 1978).
Courts have reached different conclusions in connection with other types of claims. CF&I, supra, 135 L.Ed.2d at 2110 (10% tax on an accumulated funding deficiency under a pension plan not a tax); In re Juvenile Shoe Corp. of America, 99 F.3d 898, 901 (8th Cir. 1996)(15% flat tax under 26 U.S.C. §4890 on funds reverting to employer from over-funded pension plan to an excise tax); In re Camilli, 94 F.3d 1330, 1331 (9th Cir. 1996), cert. denied, 117 S.Ct. 952 (1997)(reimbursement to state for amounts paid to injured employees of uninsured employers are excise taxes); In re Suburban Motor Freight, Inc., 998 F.2d 338, 341-342 (6th Cir. 1993)(premiums for mandatory workers compensation insurance are excise taxes); United States v. Ringley, 985F.2d 185, 187-188 (4th Cir. 1993)(reclamation fees under Surface Mining Control and Reclamation Act are excise taxes); Williams v. Motley, 925 F.2d 741, 743 (4th Cir. 1991)(assessment for operation of an automobile without liability is an excise tax); Brock v. Washington Metro Transit Area Auth., 796 F.2d 481 (D.C. Cir. 1986), cert. denied, 481 U.S. 1013 (1987)(premiums owed under District of Columbia Workers Compensation Act were user fees, not taxes); and In re Freymiller Trucking, Inc., 194 B.R. 914 (Bankr. W.D. Okla. 1996)(state claims for reimbursement from uninsured employers for employee’s medical expenses are not excise taxes).
 In re Dawson, 98 B.R. 519 (Bankr. D.Ore. 1989).
 Section 507(a)(8)(F) accords priority to customs duties on the importation of merchandise if the merchandise: (1) entered the country for consumption within the one year pre-petition; (2) was covered by an entry that was liquidated or reliquidated within one year pre-petition; or (3) entered the country within the four year pre-petition, but remained unliquidated as of the petition date because either the merchandise was being investigated by the Treasury Department for the assessment of duties or the customs officer lacked sufficient information to permit the appraisement or classification of the merchandise.
 Section 507(a)(8)(G) provides that penalties related to priority taxes under Section 507(a)(8)(A) through (F) that compensate the government for actual pecuniary loss are accorded priority. Purely punitive tax penalties are denied priority. In re Suburban Motor Freight, Inc., supra, 36 F.3d 484 (6th Cir. 1994). Courts treating interest on a priority tax claim as a penalty generally allow it as a compensatory penalty. In re Garcia, supra, 955 F.2d 16, 18 (5th Cir. 1992); In re Divine, 127 B.R. 625, 630 (Bankr. D.Minn. 1991); In re Stonecipher Distributors, 80 B.R. 949, 950 (Bankr. W. D.Ark. 1987)(interest on a priority claim accorded priority as part of the claim); In re Brinegar, 86 B.R. 176, 178 (Bankr D.Colo. 1987)(same). However, courts have split on whether penalties related to pension obligations are compensatory penalties. Compare In re Cassidy, 983 F.2d 161, 164 (10th Cir. 1992)(10% penalty on the premature withdrawal of pension funds pursuant to 26 U.S.C. §72(t) was not a compensatory penalty) and In re C-T of Virginia Inc., 977 F.2d 137, 139-140 (4th Cir. 1992), cert. denied, 507 U.S. 1004 (1993)(termination penalty was a compensatory penalty).
 Section 523(a)(1)(B) of the Bankruptcy Code.
 The two subsections of Section 523(a)(1)(B) of the Bankruptcy Code provide that taxes with respect to which a required return was either not filed or filed late are not dischargeable. Under Section 523(a)(1)(B)(i), a debtor’s failure to file a return renders any tax non-dischargeable, no matter how old the tax. Under Section 523(a)(1)(B)(ii), if the required return was filled after it was due and during the two years immediately preceding the petition date, the tax is non-dischargeable.
 In re Spain, 182 B.R. 233, 235 (Bankr. S.D.Ill. 1995).
 26 U.S.C. §6020.
 In re Bergstrom, 949 F.2d 341, 343 (10th Cir. 1991)(citing 26 U.S.C. §6020(a))
 In re Smith, 96 F.3d 800, 802 (6th Cir. 1996).
 The debtor cited Rule 9006 of the Federal Rules of Bankruptcy Procedure.
 Smith, supra, 96 F.3d at 802-803.
 4 Collier on Bankruptcy ¶523.07[a] at 523-35 (15th ed. 1997).
 In re Dyer, 158 B.R. 904, 906 (Bankr. W.D.N.Y. 1993).
 The two-year period is further extended as provided by applicable tax law.
 In re Tibaldo, 187 B.R. 673, 675 (Bankr. C.D.Cal. 1995). See also In re Jones, 177 B.R. 541, 544 (Bankr. N.D.Ohio 1994).
 26 U.S.C. §6503.
 Section 523(a)(1)(C) of the Bankruptcy Code.
 In re Brackin, 148 B.R. 953, 956 (N.D.Ala. 1992)
 Brackin, supra, 148 B.R. at 956.
 26 U.S.C. §6653(b).
 Commissioner v. Berkery, 192 B.R. 835, 841 (E.D.Pa. 1996), aff’d, 111 F.3d 125 (3rd Cir. 1997), cert. denied, 118 S.Ct. 208 (1997).
 Berkery, id.
 See Berkery, supra, 192 B.R. at 841 (and the cases cited therein).
 Merely overstating exemptions on a W-4 form has been found to be insufficient evidence of willfulness. In re Peterson, 152 B.R. 329, 355 (D.Wyo. 1995). However, filing false withholding statements with the stated purpose of reducing the tax withheld to $0 has been held to demonstrate willfulness. In re Ketchum, 177 B.R. 628, 630 (E.D.MO. 1995).
 Fegeley, supra. 118 F.3d at 983-984; In re Zuhone, 88 F.3d 469, 471 (7th Cir. 1996); In re Birkenstock, 87 F.3d 947, 952 (7th Cir. 1996); Balton v. IRS, 77 F.3d 1297, 1300 (10th Cir. 1996); In re Bruner, 55 F.3d 195, 200 (5th Cir. 1995); In re Laurin, 161 B.R. 73, 75 (Bankr. D.Wyo. 1993).
 Haas, supra, 48 F. 3d at 1154.
 Fegeley, supra, 118 F.3d at 983 (quoting Haas, supra, 18 F.3d at 1158); Dalton, supra, 77 F.3d at 1301 (non-payment is evidence, not proof, of willfulness).
 Compare Fegeley, supra, 118 F.3d 979 (failure to pay coupled with knowing and intentional failure to file returns, lavish living, sufficient funds to pay taxes, and gross underestimations of income and sheltering income in a “tax church”); and Haas, supra, 48 F.3d at 1154 (debtor had filed accurate returns and had used income to pay living and business expenses).
 In re Toti, 24 F.3d 806, 809 (6th Cir. 1994), cert. denied, 513 U.S. 987 (1994). But see In re Gathwright, 102 B.R. 211, 213 (Bankr. D.Ore. 1989)(debtor’s attempt to thwart collection of tax irrelevant to determination of dischargeability).
 In re Berzon, 145 B.R. 247, 250 (Bankr. N.D.Ill. 1992).
 Fegeley, supra, 118 F.3d at 984, citing Toti, supra, 24 F.3d at 809.
 Fegeley, supra, 118 F.3d at 984.
 Fegeley, supra, 118 F.3d at 983.
 Haas, supra, 48 F.3d 1153, 1155-1157 (11th Cir. 1995).
 Zuhone, supra, 88 F.3d 469, 471 (7th Cir. 1996).
 Birkenstock, supra, 87 F.3d 947, 952 (7th Cir. 1996).
 Dalton v. IRS, 77 F.3d 1297, 1300 (10th Cir. 1996).
 Bruner, supra, 55 F.3d 195, 200 (5th Cir. 1995).
 Ketchum, supra, 177 B.R. 628, 630 (E.D.Mo. 1995).
 Laurin, supra, 161 B.R. 73, 75 (Bankr. D.Wyo. 1993).
 Section 523(a)(7) of the Bankruptcy Code.
 Section 523(a)(7) of the Bankruptcy Code generally excepts non-compensatory, punitive tax penalties from discharge. Non-compensatory tax penalties are not excepted from discharge if they either relate to a dischargeable tax or have been imposed in connection with a transaction occurring more than three years before the petition date. Non-compensatory tax penalties are not accorded priority under Section 507(a)(8), either. Section 523(a)(7) states that a debt is non-dischargeable “to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss, other than a tax penalty- (A) relating to a tax of a kind not specified in paragraph (1) of this subsection [Section 523(a)(1)]; or (B) imposed with respect to a transaction or event that occurred before three years before the date of the filing of the petition.”
 In re Hanna, 872 F.2d 829, 831 (8th Cir. 1989).
 In re Roberts, 906 F.2d 1440, 1441 (10th Cir. 1990).
 McKay v. United States, 957 F.2d 689, 693-694 (9th Cir. 1992).
 The taxing authority also was found not entitled to post-petition interest on unsecured non-dischargeable tax claims. In re Leahey, 169 B.R. 96, 100 (Bankr. D.N.J. 1994).
 Section 523(a)(14) of the Bankruptcy Code.
 Section 523(a)(14) provides that debts “incurred to pay a tax to the United States that would be non-dischargeable pursuant to paragraph (1) [Section 523(a)(1)]” are non-dischargeable.
 H.R. Rep. No. 103-835 103d Congress, 2d Session (1994).
 4 Collier on Bankruptcy ¶523.20 at 523-104 (15th ed. 1997).
 In re Burns, 887 F.2d 1541, 1543 (11th Cir. 1989).
 Section 502(b)(2) of the Bankruptcy Code.
 Section 507(a)(8) of the Bankruptcy Code.
 Section 523(a)(1)(A) of the Bankruptcy Code.
 In re Garcia, 955 F.2d 112, 119 (7th Cir. 1988).
 In re Larson, 862 F.2d 112, 119 (7th Cir. 1988).
 Section 1328(a) of the Bankruptcy Code.
 Section 1328(a) of the Bankruptcy Code.
 If the debtor cannot make all of the payments, he or she can seek to be excused from completing the payments under the plan and still obtain a discharge, but then all of the exceptions to discharge apply in full. Section 1328(b) and (c) of the Bankruptcy Code.
 Section 1322(a)(2) of the Bankruptcy Code.
 11 U.S.C. §1322(a)(2); In re West, 5 F.3d 423, 426 n.5 (9th Cir. 1993), cert. denied, 511 U.S.1081, 114 S.Ct. 1830, 128 L.Ed.2d 459 (1994).
 In re Lilley, 91 F.3d 491, 494-495 (3rd Cir. 1996)(tax liabilities resulting from debtor’s attempt to defraud IRS and willful tax evasion held dischargeable in Chapter 13 without full payment).
 Section 1141(d) of the Bankruptcy Code.
 Section 1141(d)(1) of the Bankruptcy Code.
 Section 1141(d)(2) of the Bankruptcy Code.
 Under Section 1151(d)(2) of the Bankruptcy Code, an individual Chapter 11 debtor cannot be discharged of the debts enumerated in Section 523. Section 523(a)(1)(A) of the Bankruptcy Code excepts from discharge those taxes that are afforded priority status under Section 507(a)(8).
 Section 507(a)(8)(A)(iii) of the Bankruptcy Code.
 In re Fein, 22 F.3d 631, 632 (5th Cir. 1994).
 Section 1141(d) of the Bankruptcy Code.
 Section 1129(a)(9) of the Bankruptcy Code.
 Section 1141(d)(1) of the Bankruptcy Code.