Tax debt not discharged in bankruptcy when service prepares returns.

• Author: Koppel, Michael D.

In Neal Swanson, 121 TC No. 7 (2003), a case of first impression, the Tax Court ruled that "substitutes for return" (SFRs), which are prepared by the Service when the taxpayer does not file, are not returns under Bankruptcy Code Section 523(a)(1)(B). Thus, the taxpayer is not discharged from the tax debt and cannot avoid paying taxes by not filing. The Tax Court also clarified some related jurisdictional issues.

Background

Neither the Internal Revenue Code nor the Bankruptcy Code defines "return." In Beard, 82 TC 766 (1984), aff'd, 793 F2d 139 (6th Cir. 1986), the Tax Court ruled that to qualify as a return, a document must purport to be a return, be executed under penalty of perjury, contain sufficient data to allow calculation of tax and represent an honest and reasonable attempt to satisfy the tax law.

Sec. 6020(b) permits the Service to prepare returns for taxpayers who fail to do so, using any available information; such returns are "prima facie good and sufficient for all legal purposes." However, Sec. 6020(a) requires the delinquent taxpayer to sign the SFR before it can be accepted as the taxpayer's filed return. Also, the Service can prepare SFRs that do not meet Sec. 6020(b)'s requirements; see Spurlock, 118TC 155 (2002).

Bankruptcy Code Section 523(a)(1)(B) does not permit an individual debtor to be discharged from a tax debt if a required return either was not filed or was filed late (including extensions) and after two years before the date of bankruptcy filing.

Sec. 6213 allows taxpayers to appeal a Sec. 6211 deficiency notice to the Tax Court. Secs. 6320 and 6330 provide taxpayers with due process rights in lien and levy actions, including the right to a hearing before the IRS's Office of Appeals (Appeals). Under Sec. 6330(c)(2), the hearing is limited to collection issues; the taxpayer cannot raise the underlying tax liability unless the taxpayer has not received a deficiency notice or otherwise had an opportunity to dispute the liability. Sec. 6330(d) allows a taxpayer to appeal the Service's determination in the hearing to the Tax Court, but does not specify whether the Tax Court's standard of review is de novo or abuse of discretion.

In Washington, 120 TC 114 (2003), the Tax Court held that, although it does not have jurisdiction to determine whether an unpaid tax debt has been discharged in Bankruptcy Court in a Sec. 6213 deficiency proceeding, it does have jurisdiction to so rule in an appeal from a lien hearing under...