J Thomas Black
Board Certified, Consumer Bankruptcy Law- Texas Board of Legal Specialization

In the Hernandez case out of the San Antonio Bankruptcy Court, the Court determined that IRS taxes should not be discharged.

This is a problem that I often see in my Houston bankruptcy law office, people come in to see me and owe a large amount of old taxes. Income taxes can be discharged in bankruptcy, generally speaking, if they (1) are more than 3 years old, measured from the "due date" of the tax return; (2) tax returns were filed more than 2 years before the filing of the bankruptcy; (3) were not "assessed" or formally determined to be due within 240 days before filing bankruptcy; (4) were not the result of a false or fraudulent tax return; and (5) the taxpayer did not willfully attempt to evade or defeat the tax. But where the problem comes in, in many cases, is if the debtor filed the tax returns, but late.

According to the 5th Circuit case of Matter of McCoy (as to Mississippi state income taxes) and the attached bankruptcy court case of In re Eddie Hernandez (as to IRS income taxes), if you filed your tax returns late, presumably even a day late, then they are never able to be discharged in bankruptcy. My understanding is that the I.R.S. is not taking that extreme a position.

The I.R.S. is taking the position that so long as they had not already filed a tax return for you, i.e. a "substitute for return" or "SFR," and so long as you filed your delinquent income tax returns more than 2 years before you file bankruptcy, and the other 4 requirements to discharge taxes are met, then the income taxes will be discharged or canceled in bankruptcy. And even if they have filed an SFR, only that amount of taxes is non-dischargeable. If you later file your own return, and you owe even more taxes, you can wait two years, file the bankruptcy, and at least discharge the increased amount of tax that you owed by reason of filing the late returns.

And this concurs with the I.R.S. "Litigating Position Regarding the Dischargeability in Bankruptcy of Tax Liabilities Reported on Late-Filed Returns and Returns Filed After Assessment" dated Sept. 2, 2010. So even though these court decisions are extremely harsh, the I.R.S. position is reasonable. Just file your returns before the I.R.S. files one for you, and wait two years, and your income taxes will be dischargeable in bankruptcy.

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