Must All Tax Returns be Filed Prior to Filing Bankruptcy?

A common question asked by tax professionals is whether an individual taxpayer is eligible to file Chapter 13 bankruptcy if that taxpayer has failed to file any IRS 1040 tax returns. The quick answer is a taxpayer is eligible to file bankruptcy even if that taxpayer has unfiled tax returns. However, a longer answer provides more guidance.

The US Bankruptcy Code does NOT require a taxpayer to be in compliance with all filing requirements as of the day the bankruptcy petition is filed. The taxpayer has time after the bankruptcy case is filed to tender to the IRS any missing tax returns. Section 1308(a) of the Bankruptcy Code, 11 U.S.C. §1308(a), requires a taxpayer to file all tax returns for the four years prior to the bankruptcy filing date; the submission deadline is not identified by statute as a certain number of days after the bankruptcy case is filed. Instead, the deadline is set as no later than the day before the Section 341 meeting of creditors, which is approximately 30-45 days after the bankruptcy case is filed.

Therefore, a taxpayer can file bankruptcy for immediate protection from creditors even though that taxpayer is delinquent on tax filings on the bankruptcy filing date. But the Court, trustee, and creditors will be watching closely to determine if the taxpayer files the missing IRS tax returns prior to the deadline of one day before the Section 341 meeting of creditors. Some trustees will refuse to conduct the Section 341 meeting of creditors if the returns have not been filed. Other trustees could conduct the meeting despite objections from the creditors.

The taxpayer’s bankruptcy case is in jeopardy if the taxpayer fails to file the missing tax returns before the bankruptcy deadline. The case is subject to dismissal if the deadline is missed. That was the case in In re Mohamed, 523 B.R. 287, 290 (D.D.C. 2014). In Mohamed, the taxpayer filed bankruptcy in October of 2013 even though the taxpayer had never filed the 2012 tax return. The Chapter 13 trustee moved to dismiss the case because the taxpayer had failed to file the missing tax return before the bankruptcy deadline. At trial, the taxpayer’s witness stated that the 2012 tax return was filed, but the witness had no proof of filing and could not remember whether the return was filed prior to the bankruptcy deadline. On the other hand, the trustee testified that the taxpayer himself had admitted at the Section 341 meeting of creditors that the 2012 tax return was never filed. Also, the trustee introduced into evidence the IRS’ proof of claim that stated the 2012 tax return was never filed.

The bankruptcy court repeated that the taxpayer was required to file all tax returns for the past four years no later than the day before the Section 341 meeting of creditors. Then, the court found that the taxpayer did not timely submit the 2012 tax return and that the court was therefore required to dismiss the bankruptcy case pursuant to 11 U.S.C. §521(e)(2)(B) and §1307(e). The taxpayer appealed. The appellate court affirmed the bankruptcy court’s ruling and dismissed the bankruptcy case.

Best practices: File all unfiled tax returns before filing the bankruptcy case. If emergency protection from creditors is required, then a bankruptcy case should be filed to obtain an injunction against the creditors. But, the taxpayer and the tax professional must strive to file the missing tax returns as quickly as possible after the bankruptcy case and prior to the deadline of one day before the Section 341 meeting of creditors.

For follow-up questions, contact attorney Robert V. Schaller by clicking here.

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