The courts are divided regarding the dischargeability of tax obligations relating to a late-filed tax return. An earlier blog discussed the First Circuit’s conclusion that a late-filed tax return is deemed NOT A RETURN for bankruptcy purposes solely because it was filed after the tax filing deadline. See In re Fahey, 779 F.3d 1 (1st Cir. 2015).
However, a different conclusion was reached by the bankruptcy court in In re Biggers, 528 B.R. 870 (Bankr. M.D.TN 2015). In Biggers, the court rejected Fahey’s rational and ruled that a late-filed return can be deemed a “return” if it meets the definition of “return” as set forth in Beard v. Commissioner, 82 T.C. 766, 1984 WL 15573 (1984), affirmed 793 F.2d 139 (6th Cir. 1986). In order for a Form 1040 to qualify as a “return” pursuant to the Beard test: (1) it must purport to be a return; (2) it must be executed under penalty of perjury; (3) it must contain sufficient data to allow calculation of tax; and (4) it must represent an honest and reasonable attempt to satisfy the requirements of the tax law. In re Biggers, 528 B.R. 870, 872 (Bankr. M.D.TN 2015).
The Biggers court agreed with the IRS and those decisions that define “applicable non-bankruptcy laws” (11 U.S.C. Section 523(a)(*)) as the pre-BAPCPA Beard test and found a Form 1040 is a “return” if it satisfies the Beard test. The court rejected the idea that the reference to “applicable non-bankruptcy laws” relates to the filing deadline imposed by the taxing authority per statute.
In Biggers, the taxpayers had filed multiple returns AFTER the filing deadline and AFTER the IRS had already assessed the tax. The court found that the late-filed returns served no purpose on all but one return because the tax liability disclosed on the late-filed return was less than the amount assessed by the IRS and therefore did not “represent an honest and reasonable attempt to satisfy the requirements of the tax law,” as required by the fourth prong of the Beard test. However, the court allowed the discharge of tax relating to the one late-filed return that disclosed liability greater than the amount assessed by the IRS. The Court allowed the discharge as to the tax liability that exceeded the IRS’ assessed liability that return.
Practice Pointer: File all tax returns and perform all other filing obligations on a timely basis. It is a risky landscape on this issue. The courts are split and no definitive ruling exists for Illinois taxpayers. So, a taxpayer seeking to discharge tax debts in a Chapter 7 bankruptcy should file all returns on a timely basis and then file bankruptcy after the two-year waiting period has expired (plus satisfy all other Section 523 requirements).
For follow-up questions, contact attorney Robert V. Schaller by clicking here.