Timing Matters When Determining Dischargeability of Tax Debts

Income taxes are dischargeable in bankruptcy under certain circumstances. The three main rules of dischargability are as follows. First, the tax must be for a tax year for which a return was due (including any extension) at least three years prior to the date of filing (the “three-year rule”). Second, the tax must have been assessed more than 240 days prior to filing (the “240-day rule”). Third, the tax return must have been filed at least two years prior to filing (the “two-year rule”). These rules are simple enough to apply; however, a major problem can arise when the taxpayer files a late return.

If you fail to file a return, the IRS or state taxing authority may file a Substitute Filed Return (“SFR”). An SFR does not qualify as a filed return and therefore will not be discharged. If you then file a late return after an SFR has been filed, does that qualify as a filed return allowing the tax debt to be dischargeable pursuant to above the rules? Currently, the answer depends on the jurisdiction in which you live.

Recently, in Justice v. U.S.A., No. 15-10273 (11th Cir. March 30, 2016), the 11th Circuit rejected both the draconian rule that a late filed return can never be discharged and the debtor friendly rule that a late return is dischargeable as long as validly filed and adopted a less lenient middle ground position. According to the 11th Circuit (which includes Georgia, Florida and Alabama) the late return qualifies as a return provided it constituted an honest and reasonable attempt to comply with tax law.

In March 2017, the United Supreme Court declined to resolve the current split amongst the states on if and when a return filed after a SFR can be discharged, so for the foreseeable future, you should make sure to file your tax returns timely and consult with an experience bankruptcy attorney to help you determine if bankruptcy can help you with your tax debt.