Taxpayers will be denied a discharge if they failed to file a tax return.
This part speaks for itself! No tax return; no discharge. Taxpayers who fail to file a tax return are not allowed to discharge income tax debts. Remember, a taxpayer’s duty to “file” a tax return is independent of a taxpayer’s duty to “pay” the tax debt.
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). See Blog. 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 same conclusion was reached in In re McBride, 534 B.R. 326 (Bankr. S.D.OH 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.