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.
If an individual owes past federal taxes, the tax debt may be dischargeable if the debt meets certain conditions. However, under Section 523(a)(1)(B) of the Bankruptcy Code, a tax debt is not subject to discharge if the tax return or equivalent document was not filed.
The Court’s Decision
The issue in this case was whether the man’s 1040 forms that he eventually filed constituted “returns.” Some courts, based on interpretations of the word “return,” determined that a tax form had to filed by the deadline to be considered a return. In this case, the appeals court considered instead whether the 1040 form filed met four requirements: 1) it purported to be a return, 2) it was executed under penalty of perjury, 3) it contained sufficient data to calculate the tax, and 4) it was an honest and reasonable attempt to satisfy the tax law’s requirements.
Since the man filed his forms late, the court found it was not an honest or reasonable attempt to satisfy the tax law. Tax returns are meant to provide information to the government regarding the amount the taxpayer owes, and if the taxpayer fails to file a return, the IRS is required to independently assess the taxpayer’s liability. Thus, a subsequent filing is no longer a tax “return,” since it is not an honest and reasonable attempt to comply with the tax law. For these reasons, the court found the man’s filings were not tax returns, and thus they were not dischargeable under Section 523(a)(1)(B).
Do You Have Bankruptcy Questions?
If you are considering filing for bankruptcy, it is important to understand how your past tax debts and your tax refunds fit into your potential bankruptcy petition. Not all debts are subject to discharge. At Kruger & Schwartz, we help Kentucky and Indiana individuals and families face their financial challenges, and we strive to identify possible solutions that will help you improve your life and get your finances back on the right track. To get information about the bankruptcy process and what to expect, schedule a free initial consultation by calling us toll-free at 866-366-3328 or sending us an email online.
More Blog Posts:
Ex-Girlfriend’s Claim Against Debtor Seeking to Exempt Loan from Bankruptcy Fails Because Court Finds Debtor Did Not Make False Statement, Kentucky Bankruptcy Lawyers Blog, published May 8, 2017.
Debtor Refuses to Provide Tax Returns After Receiving Discharge, Court Finds Revocation of Discharge Is Appropriate, Kentucky Bankruptcy Lawyers Blog, published April 27, 2017.