Taxpayers can discharge income tax liability relating to late-filed returns by filing Chapter 7 bankruptcy.

A Chapter 7 bankruptcy general discharge eliminates a debtor’s obligation to pay debts.  11 U.S.C. §727.  However, income tax debts relating to an unfiled tax return are excepted from the general discharge and survive the bankruptcy.  11 U.S.C. §523(a)(1)(B)(i).  The issue in Biggers was whether an IRS Form 1040 can be considered a “return” for bankruptcy purposes when filed after the due date and after the IRS unilaterally assessed a tax.

The Biggers court noted that courts across the country are divided regarding the issue of discharging tax obligations relating to late-filed tax returns.  Some courts have concluded that a late-filed tax return can never be a “return” for bankruptcy purposes solely because the return was filed after the tax filing deadline – even one day late.  See, e.g., In re Fahey, 779 F.3d 1 (1st Cir. 2015).  These courts rely on the Bankruptcy Code’s definition of “return” contained in 11 U.S.C. Section 523(a)(*), which states the term “return” means a return that satisfies the requirements of “applicable nonbankruptcy law”-including applicable filing requirements.

However, the Biggers court reached a different conclusion and rejected Fahey’s rational and held that a late-filed return can be deemed a “return” for bankruptcy purposes 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).  The Beard test determining whether an IRS Form 1040 is a “return” has four prongs: (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.   

The Biggers court agreed with those decisions that define the phrase “applicable non-bankruptcy laws” of 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 narrowly to the filing deadline imposed by the taxing authority per statute.

The Biggers court then applied the Beard test, noting that 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 income 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.  Although not addressed in the opinion, it appears the Biggers court would have discharged all of the tax liability had the returns been filed after the filing deadline but before the IRS had assessed the tax.

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