Category Archives: Failure to File

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.

How Does “Innocent Spouse Relief” Protect Taxpayers From IRS Levies and Collections?

Taxpayers who file joint IRS 1040 tax returns are jointly and severally liable for the full tax liability no matter how much or how little they contribute to the total tax.  That liability is not affected by divorce.  Sure, a divorce court could order one party to pay all or part of the joint tax debt, but such an order does not change the fact that each spouse is jointly and severally liable to the IRS.  The IRS can pursue collections against either or both taxpayers no matter how the divorce court shifts responsibility between the joint filers.

What options are available to an ex-wife if the prior years’ joint tax liability really resulted from extraordinarily large income produced by the ex-husband and the ex-husband now refuses or is unable to pay the taxes? You should consider “innocent spouse relief” offered by the IRS pursuant to 26 U.S.C. §6015?

Tax professional must be able to distinguish between two separate scenarios that may offer “innocent spouse relief” to the ex-wife: one good, and one bad.

The good scenario relates to a situation where a tax return was never filed or the filed return understated the true tax liability.  That scenario causes the IRS to assess a tax for the never filed return or assess a tax deficiency for the understated portion of the tax liability.  Section 6015 of the Internal Revenue Code grants the IRS authority to eliminate the assessed tax deficiency under the “innocent spouse relief” program when the innocent spouse had no knowledge of the understatement and had no reason to know of the understatement.  A perfect example is a wife of a self-employed home-remodeler and the wife has no involvement with the business and no knowledge that the home-remodeler underestimated the tax liability on the joint tax return.

The bad scenario relates to a situation where a tax return was properly filed and did NOT understate the tax liability on the return; the tax liability exists because the taxpayers did not save sufficient funds to pay the tax liability.  That was the scenario in In re Mikels, 524 B.R. 805 (Bankr. S.D. IN 2015).  In Mikels, an ex-spouse applied to the IRS for innocent tax relief for several years.  Some of those years related to years no returns were ever filed, and other years related to years where the innocent spouse failed to pay the taxes that were properly reported on the returns.

The spouse in Mikels sought innocent spouse relief from the IRS before filing bankruptcy.  The IRS granted the innocent spouse relief as to the tax years when no tax return was filed and the IRS had assessed the tax deficiency. However, the IRS denied innocent spouse relief for the tax years that the tax return properly reported the tax liability.

The Mikels spouse filed bankruptcy and objected to the IRS’ proof of claim seeking payment for the properly reported tax liability.  The Mikels court overruled the spouse’s objection and allowed the IRS’ claim for the tax liability relating to the properly reported tax years.  The court ruled that “innocent spouse relief” is only available pursuant to 26 U.S.C. §6015 when the IRS assesses a tax deficiency and such relief is not available when the taxpayers merely fail to pay the tax.

PRACTICE POINTERS: Innocent spouse relief is a great tool for ex-spouses who were deceived by their self-employed ex-spouses who underreported net income and concomitantly underreported the total tax liability.  However, the tax professional must be able to spot when the IRS will grant such relief and when it won’t.  The simple rule is no relief when the tax was reported accurately, and relief may be available it the tax was underreported and the ex-spouse had no knowledge of the underreporting.

For follow-up questions, contact attorney Robert V. Schaller by clicking here.
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Can Bankruptcy Discharge Income Taxes Filed More Than 2 Years Before the Bankruptcy Filing?

Short Answer:  Yes, income taxes can be discharged in bankruptcy if the taxpayer satisfies all of the bankruptcy requirements.  One of the contested issues is whether tax liability relating to a late-filed return can ever be discharged.  Another issue is whether the paper filed with the taxing authority is deemed a “return” for bankruptcy purposes.  These issues were addressed in In re McBride, 534 B.R. 326 (Bankr. S.D.OH 2015).

Facts: The taxpayer filed multiple city tax returns for taxes imposed by the City of Kettering, Ohio (“City”).  Some returns were filed on a timely basis and at least one return was filed after the due date. The tax liability due on these returns was calculated in relation to the IRS tax liability.  This liability was dramatically understated as a result of the taxpayer’s scheme to minimize tax liability through a now discredited “abusive trust arrangement.”  The US Tax Court found taxpayer’s self-reported returns dramatically deficient and increased the tax liability substantially, which caused the City tax liability to be increased proportionately.

Argument: In response, taxpayer filed chapter 7 bankruptcy to discharge the tax liability more than 2 years after the original City returns were filed. Taxpayer then filed an adversary proceeding to determine the dischargeability of the tax and filed a motion for summary judgment to obtain a judgment.  City objected asserting that the taxes owed are nondischargeable under 11 U.S. C. §523(a)(1)(B)(i) because the taxpayer never filed qualifying “returns.”  City argued the documents filed do not constitute “returns” because one return was untimely and all of the tax documents significantly under-reported the taxpayer’s income.

Analysis: The McBride court was forced to resolve the issue. There, the court addressed the two competing arguments regarding whether a late filed return can ever be a “return” for bankruptcy purposes.  The McBride court noted that the hanging paragraph in §523(a)(*) attempts to define the term “return.”  However, the court found the statute’s definition unclear and begged the question “Is §523(a)(*) pointing to the definitional provisions in state or local tax law to define the term ‘return’ for §523(a) purposes or, instead, must the document satisfy all aspects of the relevant nonbankruptcy ta law, including filing requirements, in order to be a ‘return’?” (Emphasis added).

The McBride court considered and rejected City’s bright-line test adopted by the Fifth Circuit in McCoy v. Miss. State Tax Comm’r (In re McCoy), 666 F.3d 924 (5th Cir. 2012) and followed by the Tenth Circuit in Mallo v. Internal Revenue Service (In re Mallo), 774 F.3d 1313 (10th Cir. 2014) and the First Circuit in Fahey v. Mass. Dept. of Revenue (In re Fahey), 779 F.3d 1 (1st Cir. 2015).  This test looks strictly at the tax statute’s filing deadline and would render taxes nondischargeable if the return was filed even one day late.

Instead, the McBride court applied the simplest meaning to §523(a)(*)’s definition of “return” as it relates to the nondischargeability of income taxes. The court held that §523(a)(*) required the court to look to relevant nonbankruptcy law to determine what qualifies as an acceptable return under that law. The court believed that if a document filed with the federal, state, or local taxing authority meets the applicable tax code’s DEFINITION of an acceptable return, then it is a return under §523(a)(*) even if the document does not fully comply with all aspects of the relevant tax code.

When a formal definition of return in the applicable tax statute is absent, the court must look to another source for determining whether the taxpayer’s tax documents qualify as a return.  The Sixth Circuit applied a four-part test to determine whether a tax form qualifies as a tax “return” for bankruptcy purposes: (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 the tax; and (4) it must represent an honest and reasonable attempt to satisfy the requirements of tax law.  See Beard v. Commissioner, 82 T.C. 766 (1984) adopted by United States v. Hindenlang (In re Hindenlang), 164 F.3d 1029 (6th Cir. 1999).

The McBride court applied its analysis to the case and bar and concluded that questions of fact existed and these facts had to be determined before the Beard test could be applied.  Therefore, the court denied the taxpayer’s motion for summary judgment and allowed the parties to present evidence to determine if the tax returns filed with the City were “returns” for bankruptcy purposes.

Practice Pointer: File all tax returns and perform all other filing obligations on a timely basis.  Wait the two years after filing the tax returns (and meet all other requirements) before filing bankruptcy.  Then expect to battle the taxing authority if the returns were filed late or substantially understated the tax liability.

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

What is the Effect of Crossing-Out the “Penalty of Perjury” Verification on an IRS 1040 Form?

The IRS 1040 Form concludes with a taxpayer’s obligation to sign the return under penalties of perjury, and to declare that the taxpayer has examined the return and accompanying schedules and statements, and state to the best of the taxpayer’s knowledge and belief, they are true, correct, and complete.

But what happens to a taxpayer who strikes or otherwise scratches-out the verification?  A taxpayer scratched-out the verification and suffered the consequences in United States v. Moore, 627 F.2d 830 (7th Cir. 1980).  In Moore, the taxpayer who scratched out the verification on tax returns filed over several years was indicted for tax evasion for failing to file income tax returns.  The IRS did not consider the unverified tax returns as tax “Returns.”

The court noted the taxpayer’s duty to sign a return that verifies its accuracy under penalties of perjury.  The Moore court found that debtor’s failure to verify the return under penalty of perjury resulted in the return not being deemed a “Return” for tax purposes. Id. at 834.

Practice Pointers: The best strategy is for the taxpayer to hand-deliver the tax returns to an IRS office and to have an extra copy hand-stamped “Filed” by the IRS representative.  A taxpayer should ask that both page 1 and page 2 of the Form 1040 be stamped so that the taxpayer has proof that the return was signed.

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

Can a Taxpayer Eliminate Tax Debt if He Failed to File a Return Until After the IRS Assessed the Tax?

An old case is instructive for taxpayers who live in Illinois, Indiana, and Wisconsin.  See In re Payne, 431 F.3d 1055 (7th Cir. 2005).  This case is more than 10 years old and applies pre-BAPCPA law, but it is the only case addressing the issue issued by the US Court of Appeals for the Seventh Circuit. Other circuit courts have ruled on the issue. SEE BLOGS. Again, the 7th Circuit has not yet ruled on the issue for taxes due after the 2005 BAPCPA law was enacted.

In Payne, the taxpayer failed to file the 1986 tax return until 1991, which was one year AFTER the IRS had assessed tax liability for income tax due.  Taxpayer offered to compromise his tax debt in 1992, but the IRS rejected the offer.  Five year later taxpayer filed for Chapter 7 bankruptcy relief in 1997.

The court correctly noted that Section 523(a)(1)(B)(i) of the Bankruptcy Code forbids the discharge of federal income tax liability with respect to which a “return” was required to be filed but “was not filed.”  The taxpayer argued that the return filed in 1992 was a “return” as used in the statute, albeit filed six years late and after the IRS had gone to the trouble of figuring out what the taxpayer owed.  The IRS argued that an untimely post-assessment return is not a “return” within the meaning of the statute and that therefore taxpayer never filed a 1986 “return” and so cannot be discharged from liability for the taxes that the taxpayer owes for that year.

The Payne court noted that the Bankruptcy Code had not defined the term “return” pre-BAPCPA.  However, cases held that to be deemed a return, a document filed with the IRS must (1) purport to be a “return,” (2) be signed under penalty of perjury, (3) contain enough information to enable the taxpayer’s tax liability to be calculated, and (4) “evince[] an honest and genuine endeavor to satisfy the law.  Id. at 1057, citing United States v. Moore, 627 F.2d 830, 834-35 (7th Cir. 1980). The Payne court further declared that a purported return that does not satisfy all four conditions does not play the role that a tax return is intended to play in a system of self-assessment.  So while a “return” that satisfies the first three conditions comports with the literal meaning of the word, it does not comport with the functional meaning.

The whole dispute in Payne was whether the taxpayer satisfied the fourth prong of the test and “endeavored to satisfy the law” by filing the 1986 tax return in 1992.  The court rejected a line of reasoning used by other courts that the a late-filed return after the IRS assessed the tax does not serve the purpose of the filing requirement.  The Payne court expressly stated that the legal test is not whether the filing of a purported return has some utility for the tax authorities, but whether it is a reasonable endeavor to satisfy the taxpayer’s obligations.  So the bankruptcy courts should not look through the eyes of the IRS to determine usefulness; rather, the court should look through taxpayer’s eyes to determine if the taxpayer’s efforts constituted a reasonable endeavor to satisfy the taxpayer’s obligations.

The majority of the Payne court reversed the lower court and found that the taxpayer had not reasonable endeavored to satisfy the taxpayer’s obligations.  Hence the tax debt was excepted from discharge.  However, a persuasive counter argument was asserted in a dissent by Circuit Judge Easterbrook, who argued that the return was a “return” for bankruptcy purposes.  The judge believed taxpayer’s failure to timely file the return was distinct from the definition of “return.”  Instead, the judge believed motive may affect the consequences of a late-filed return, but not the definition of “return.”  Motive was an issue relating to Section 523(a)(1)(C) and whether taxpayer “willfully attempted… to evade or defeat” the tax.  Remember, however, this case relates to pre-BAPCPA law established in 2005.  Judge Easterbrook, in dicta, suggested the result would be different if the BAPCPA law was applicable.

Practice Pointer:  This is an old case and several circuit courts have recently ruled that a late-filed return does NOT constitute a “return” for bankruptcy purposes.  So file those returns on time.  The Seventh Circuit has yet to issue a ruling, but a future circuit court panel could agree with Judge Easterbrook’s dissent.

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

Can a Taxpayer who Files a Tax Return After the IRS Assesses the Tax Eliminate the Tax Debt in Bankruptcy?

A Chapter 13 debtor could discharge the tax debt by paying the tax liability through the repayment plan.  However, most people are interested in the dischargeability of the tax debt in a Chapter 7 bankruptcy case without any payment to the IRS.

In In re Mallo, 774 F.3d 1313 (10th Cir. 2014), the taxpayers filed a Chapter 7 bankruptcy case to discharge tax debt relating to an IRS assessment made prior to the taxpayers filing the bankruptcy petition.   The taxpayers failed to file the returns for 2000 and 2001.  The IRS issued statutory notices of deficiencies pursuant to 26 U.S.C. §§ 6212 and 6213 for those years.  The IRS began collection efforts in 2006.  In response, the taxpayers filed joint Form 1040s for the missing years in 2007.

The Mallo court defined the issue as follows: whether an untimely 1040 Form, filed after the IRS has assessed the tax liability, is a tax return for purposes of the exceptions to discharge in 11 U.S.C. §523(a)(1)(B)(i) of the US Bankruptcy Code. The Court began its analysis by examining the Bankruptcy Code’s definition of “return,” which states a return “means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements).”  Id at 1318.

Second, the Mallo court noted that prior to the BAPCPA amendments of 2005  most courts determined whether a document qualified as a tax return by following the four-pronged test approved in Beard v. Commissioner, 793 F.2d 139 96th Cir. 1986).  This Beard test consisted of: (1) there must be sufficient data to calculate tax liability; (2) the document must purport to be a return; (3) there must be an honest and reasonable attempt to satisfy the requirements of the tax law; and (4) the taxpayer must execute the return under penalties of perjury. The majority of courts have held that tax forms filed after the IRS assesses the taxpayer’s liability have no valid purpose and therefore cannot satisfy the 3rd prong of the Beard test— there being no honest and reasonable attempt to satisfy the requirements of the tax law.  See In re Payne, 431 F.3d 1055 (7th Cir. 2005).

The Mallo court side-stepped the Beard test and held that 11 U.S.C. §523(a)(*) of the US Bankruptcy Code excludes late-filed Form 1040s from the definition of “return” because the “applicable filing requirement” includes filing deadlines—and late-filed returns do not satisfy applicable filing deadlines.  The court rejected the taxpayers’ argument that the “applicable filing requirements” refer not to the filing time, but to whether a tax form qualifies as a return upon form and content per the Beard test.  Apparently, the Mallo court would hold that no late-filed tax returns would ever be deemed a “return” for bankruptcy purposes.

Consequently, the Mallo court held that the taxpayer’s liability was excepted from the general Chapter 7 discharge order after finding the taxpayers’ Form 1040s were not “returns” for bankruptcy purposes of 11 U.S.C. §523(a)(1)(B)(i).

Practice Pointer: File all tax returns and perform all other filing obligations on a timely basis. There appears to be a growing trend to side-step the Beard test and find that late-filed tax returns can never be deemed a “return” and therefore can never be discharged in a Chapter 7 bankruptcy case.  The US Court of Appeals for the Seventh Circuit has not ruled on this issue directly. But read In re Payne, 431 F.3d 1055 (7th Cir. 2005).  The 7th Circuit covers all of Illinois, Indiana, and Wisconsin.

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

A Taxpayer Can Eliminate Tax Liability Relating to a Late-Filed Tax Return

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.

Can a Taxpayer who Filed a Tax Return After the Filing Deadline Eliminate the Tax Debt in Bankruptcy?

Certainly a taxpayer could file a Chapter 13 bankruptcy case and discharge the tax debt by paying the tax liability through the repayment plan.  The real question is whether a taxpayer who files a tax return after the filing deadline could file a Chapter 7 bankruptcy case and discharge the tax debt without paying the tax liability.

Until recently, the issue appeared clear that the tax debt could be discharged in Chapter 7 if the taxpayer waited to file bankruptcy at least two years after the date the tax return was filed (assuming all other factors being satisfied). The prior court cases usually related to whether the document filed with the IRS was a “return” or some other document filed with the IRS (e.g. protest letter or something less than a statement as to gross and net income).  Another issue related to whether the return was filed by the taxpayer after the IRS had already prepared a substitute for return (aka “SFR”), which rendered a taxpayer’s later-filed return moot.

Now the issue is whether any return filed after the tax filing deadline is deemed NOT A RETURN for bankruptcy purposes solely because it was filed after the tax filing deadline—even one day late.  That issues was addressed by the U.S. Court of Appeals for the First Circuit in In re Fahey, 779 F.3d 1 (1st Cir. 2015).

In Fahey, the court was confronted with taxpayers who had failed to file their Massachusetts income tax return before the deadline imposed by the state statute.  The taxpayers filed their returns late and then waited two years before filing bankruptcy.  The taxpayers sought to discharge their tax obligations by filing Chapter 7.  The Massachusetts Department of Revenue objected arguing that the tax debt was non-dischargeable because 11 U.S. C. §523(a)(1)(B) excepts from discharge any tax obligation relating to a return that “was not filed or given.”  The Department then argued that the late-filed returns were not deemed “returns” for bankruptcy purposes even though the same returns would be considered “returns” for tax purposes.

The Fahey court agreed with the Massachusetts Department of Revenue, holding that the late-filed tax returns could not be deemed “returns” for bankruptcy purposes.  Therefore, the tax obligations would not be discharged in the Chapter 7 bankruptcy because 11 U.S. C. §523(a)(1)(B) excepts from discharge any tax obligation relating to a return that “was not filed or given.”

This case is very bad for taxpayers seeking bankruptcy protection. The only good news is that the U.S. Court of Appeals that incorporates the Chicagoland area has not ruled on the issue. Hopefully, the 7th Circuit Court of Appeals would render a contrary holding and create a conflict between the circuits so the U.S. Supreme Court would decide the issue once and for all.

Practice Pointer: File all tax returns and perform all other filing obligations on a timely basis. The Fahey case may not be limited to filing obligations. It could be interpreted expansively to apply to all tax obligations other than payment obligations. 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.

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.