2-Year Filing Rule

Taxpayers are denied a discharge of tax owed relating to an untimely filed tax return filed less than two (2) years before the bankruptcy case was filed.

Section 523(a)(1)(B) limits the dischargeability of income taxes relating to unfiled tax returns and late filed tax returns. That section provides that a general discharge under Section 727 and Section 1328(b) does not discharge an individual from any income tax debt relating to unfiled tax returns, or late-filed tax returns filed within two years of the bankruptcy filing date.

Section 523(a)(1)(B)(ii) excepts from discharge taxes relating to a tax period in which the tax return was filed after the deadline.  The key to Section 523(a)(1)(B)(ii) is the word “untimely” filed, meaning the taxpayer filed the tax return after the “due date,” including any extensions thereto. Therefore, this section does NOT apply to tax returns that are timely-filed with a taxing authority; timely filed returns are not subject to the two-year look-back period.

The date of the tax year to which the tax return relates is immaterial. If a taxpayer files a tax return after its due date, including all authorized extensions, the tax liability reflected for that year would be nondischargeable unless the return was actually filed more than two years before the bankruptcy case was filed.

Section 523(a)(1)(B)(i) excepts from discharge taxes relating to a tax period in which a tax return was not filed.  There is controversy regarding whether a late-filed return could ever be considered a “return” for bankruptcy purposes even though the same late-filed return would be considered a “return” for IRS purposes.  See Blog.  Several circuits have ruled that a late-filed tax return can never be considered a “return” for bankruptcy purposes, and therefore the tax debts relating to the late-filed returns can never be discharged.  That issued has not been decided by the 7th Circuit Court of Appeals which governs Illinois and surrounding states.

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.


The blog contains some interesting legal cases involving taxpayers attempts to discharge income tax debt by filing bankruptcy.

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