BANKRUPTCY

AND

UNFILED TAX RETURNS

CHAPTER 7

     Many times clients come into our office with a number of years of unfiled tax returns.  Our task is to determine whether they will be subject to discharge.  For Chapter 7 they are not able to be discharged, unless the client has filed their returns.  Be careful if the IRS has filed a return for them (called a Substitute for Return or SFR). 

     If the IRS has filed a SFR, the tax is not subject to discharge.  If the debtor has filed a tax return after the filing of an SFR, there is a split of authority as to whether the taxes are subject to discharge.

    In the situation of an SFR, if the IRS contacted the taxpayer and he or she actually signed the SFR it does constitute a return.  This situation does happens on occasion and must be watched for. This is often called an "Agreed Return".    

     There is a complete body of case law as to what constitutes a return.  If you have a situation where your client filed something, you might have a situation where the tax is discharged.  See 11 USC 523.

     In the situation where there was an amended return filed, which shows an increase in tax, the original amount is still subject to discharge.  The amount of the increase must meet the criteria for discharge, i.e. 240 days since assessment.

     For taxes which were assessed by examination a similar situation applies.  Each subsequent assessment triggers a new 240 day assessment period.

CHAPTER 13

     Chapter 13 Provides a completely different set of rules.  Discharging taxes with unfiled returns is much easier in Chapter 13 than in Chapter 7.  The "Super Discharge" allows taxes with unfiled returns to be discharged if they meet certain criteria.  Taxes are generally dischargeable if:

1. The tax more than three years old. The requirements that the tax be more than three years old from when the return became due are virtually the same as in a Chapter 7 case. (watch out for Requests for Extensions).

2. It is not required that it has been more than two years since the tax return has been filed. As noted below, taxes where the returns have not yet been filed as of the date of filing of the bankruptcy are still, in many cases, subject to discharge.

3. Two hundred forty days since assessment. It is required that the taxes owing be assessed at least two hundred forty days before the chapter 13 is filed.

 TRAP:  Time spent in an Offer in Compromise plus 30 days will toll the running of the 240 day period.

4. Unfiled tax returns. So long as the tax is over 3 years old (and obviously not payroll taxes) the tax is dischargeable even if the returns have not been filed. This is a huge loophole for taxpayers to discharge taxes where the returns have not been filed. We file many chapter 13 cases where the taxes have not yet been filed.

      For chapter 13 purposes these taxes are dischargeable as though each and every element were met.

TRAP: A common trap is to tell a client to "file the tax returns and then we will file your bankruptcy". Filing the tax return triggers the two hundred and forty day period for assessment. We never file tax returns if there is a possibility that we are going to be filing a chapter 13 within the next short period of time. The tax returns get filed after the Chapter 13 Bankruptcy has been filed.

                  Chapter 13 provides an amazing amount of flexibility in discharging taxes that are not subject to discharge in Chapter 7.  In our office we file about 4 times as many Chapter 13 cases as Chapter 7 cases where significant amounts of taxes are involved.  

Contact Us:
The Tax Group LLC
dba
Attorneys Tax Group
82 E. State St. Suite E
Eagle, Idaho 83616
1 877TAX CREW
1 877 829 2739
Fax:208 938 8503
Martelle Law Offices PA
208 938 8500
webmaster@attorneystaxgroup.com