In a recent case, a federal court of appeals considered whether a debtor’s tax debt from his late-filed tax “returns” was dischargeable in his later bankruptcy petition. The debtor had failed to file his federal tax returns when they were due in 2000, 2001, and 2002. In 2004, the IRS investigated and assessed his tax liability. Soon afterward, the debtor filed his IRS 1040 forms for 2000 and 2001, and eventually he also submitted them for 2002. He had filed his state tax returns for those years.
In 2010, the debtor filed for Chapter 7 bankruptcy, and he received a discharge for his state tax liability—meaning that he was no longer personally liable for paying the state taxes that he owed from previous years—but not for his 2000, 2001, and 2002 tax liability. He later filed for Chapter 13 bankruptcy, and when he filed the second petition, he claimed that his federal tax liabilities for those years should have been discharged in his Chapter 7 proceeding. However, a federal appeals court determined that those debts were not dischargeable because he failed to file his tax returns on time for 2000, 2001, and 2002, and when he later filed his 1040 forms, they were not considered “returns” under the Bankruptcy Code.
Taxes and Bankruptcy Petitions
Generally, when a debtor files a Chapter 7 bankruptcy claim, the debtor is not personally liable for debts incurred before filing the petition. Those debts are part of the bankruptcy estate and are viewed as “discharged.” Yet there are certain debts that are not dischargeable.