Are client's tax returns timely enough for discharge?

• Author: Meyer, Robert

An increasing number of published cases deliver a BAPCPA (1)-created issue to the bankruptcy journals: Can a personal tax return filed under proper extension be discharged under 11 U.S.C. [section] 523(a)--most importantly when the tardy tax return's filing is deemed timely under the Internal Revenue Code?

Most taxpayers know that 1040 individual tax returns are due April 15 of most any year. (2) And, most taxpayers know that extensions for filing taxes are freely made as an entitlement occurs by merely filing an IRS-regulated form. (3) It is the latter event that could become problematic if the taxpayer later becomes a bankruptcy debtor.

The simple rule of thumb for a bankruptcy discharge of a tax debt is a chronological test: If the bankruptcy petition is filed more than three years after tax assessments, the tax should be discharged. (4) The tax assessment date is measured by the date the IRS receives the taxpayer's return. Before BAPCPA, the tax would be discharged even for those who filed tax returns under "an extension." For example, an extended return filed August 8, 1985, would be a dischargeable tax debt should the bankruptcy petition be filed after August 9, 1988. This rule has subsequently been altered by BAPCPA.

The rule of thumb changed when statutory revisions to 11 U.S.C. [section] 523(a) created the definition of "return" in a floating paragraph located after 11 U.S.C. [section] 523(a)(19), which courts describe as 523(a)(*). That section reads:

For purposes of this subsection, the term "return" means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements). Such term includes a return prepared pursuant to section 6020(a) (5) of the Internal Revenue Code of 1986, or similar [s]tate or local law, or a written stipulation to a judgment or a final order entered by a nonbankruptcy tribunal, but does not include a return made pursuant to section 6020(b) (6) of the Internal Revenue Code of 1986, or a similar [s]tate or local law.

By one code referencing another, and many practitioners being knowledgeable about one and not the other, this clause becomes problematic on many levels. But, walking back and forth between the codes brings clarity and delivers insight to the inequitable result that may occur.

Under 26 U.S.C. [section] 6020(a), the IRS secretary may file a return, even untimely, for a taxpayer under the condition that the taxpayer consents to disclose all information necessary for the preparation. Alternatively, 26 U.S.C. [section] 6020(b) addresses a taxpayer's failure to file, after which the IRS secretary files a return for the taxpayer. The latter returns, even under prior law, would not deliver a dischargeable debt. The former's fortuitous event would deliver discharge even if filed late.

Another dichotomy is that [section] 523(a) (1) uses the pre-BAPCPA language, while the 532(a)(*), or the floating paragraph, creates new interpretation and potential modification of [section] 523(a) (1). From this has come cases delivering three interpretations.

Strict Prohibition

Three circuits demand no discharge from any return filed after April 15. (7) Dire consequences may occur. Hypothetically these rulings conclude that a return filed one minute late will make the debt nondischargeable. This applies even to...