Can You Get a Bankruptcy Discharge For Late Filed Income Tax Returns?

In a case decided recently in the Massachusetts Bankruptcy Court, Judge Feeney ruled in favor of the IRS and the Massachusetts Department of Revenue.  The law is that late filed tax returns may preclude your from discharging your tax liability.

In the bankruptcy case, the debtor, Johan Nilsen, had not filed income tax returns for the years 2000 through 2005, 2007, 2009 and 2010.  Nor did Mr. Nilsen file for or receive extensions from the IRS or DOR.   In August 2010, Mr. Nilsen filed tax returns to the IRS and the DOR for all of the above years, except for 2010, which he filed for in 2012.  Mr. Nilsen did not pay the taxes owed, however.  According to the pleadings in the case, the debtor owed $217,529 to the IRS and $28,434 to the DOR.

Chapter  Personal Bankruptcy Case in Massachusetts

In March 2015 Mr. Nilsen filed for personal bankruptcy protection under Chapter 7 of the Bankruptcy Code.  The debtor properly listed the unpaid taxes.  The bankruptcy trustee, finding no assets after reviewing the Petition and Schedules and taking an examination under oath, filed a report of no distribution and, as expected, a discharge was issued by the Bankruptcy Court in a timely fashion.   Thus, all debts that were dischargeable were discharged.

However, were the taxes dischargeable?

Tax Returns or “Equivalent Reports”?

Following the bankruptcy discharge, Mr. Nilsen filed a Complaint in Bankruptcy Court to confirm that his taxes were discharged as against the IRS and the DOR.   The law, Bankruptcy Code Section 523(a)(1) says that taxes due from tax returns filed on time are dischargeable two years after filing.  However, subsection (B) in the Code says that taxes are not dischargeable if the “return, equivalent report or notice” was not filed or was filed late.  The case was decided on language in the “new” Bankruptcy Law of 2005, which elaborated on the definition of a tax return or report.

The debtor argued that his late filed tax returns were not a tax returns but “equivalent reports” (because late filed returns are not dischargeable in Massachusetts under Fahey v. Massachusetts Dept. of Revenue, 779 F.3d 1 (1st Cir. 2015).  The IRS (and the DOR) argued that the late filing of a tax return was the late filing of a tax return, not a “report” and that the law required a return or “report” to be filed timely to be discharged.  Judge Feeney agreed, stating “He filed actual returns, not something different.  It appears to this Court that the Debtor is attempting to rename the tax forms as equivalent reports to evade the holding of In re Fahey.”

What Can We Learn From This?

File your taxes, or a report of no filing on time.  Burying your head in the sand and avoiding filing tax returns will only delay the inevitable.  Further, it may prevent you from the right to discharge your tax liability if you ever need to file for bankruptcy protection.  Seek the advice of a tax preparer or a tax lawyer and get your returns filed.  If you can’t pay the taxes, your CPA or tax lawyer will advise you as to how to proceed.

Hire an Experienced Bankruptcy Attorney

Attorney Neil Burns has been representing Massachusetts consumers who need a “fresh start” in personal bankruptcy since 1985.  Call his office for a free consultation.