Posted on Oct 01, 2014

For income taxes to be discharged in bankruptcy, there are several technical requirements. One of the requirements is that the tax returns were filed more than 2 years before the filing of the bankruptcy.

If the taxpayer didn't file the returns for the tax years that they are seeking to discharge, the taxes are not dischargeable in bankruptcy. And if the IRS prepares "substitute for returns" (SFR's) from information that they have on the taxpayer, e.g. W-2's, 1099's and the like, the taxes are not discharged. In re McCoy, 666 F.3d 924 (5th Cir. 2012).

But there is an exception: if the taxpayer cooperates in filing the tax returns, and provides information to help the IRS prepare the tax returns, and the returns are filed more than 2 years before the filing of the bankruptcy, then the taxes are dischargeable. This kind of tax return is known at a 6020(a) tax return, after the section of the U.S. Tax Code that authorizes it, 26 U.S.C. Section 6020(a).

That's what happened in a recent case in Houston bankruptcy court, the Kemendo case. The taxpayer had cooperated in providing information, and the IRS prepared SFR's. Then he later filed bankruptcy, more than 2 years later. In re Kemendo, Bankr. Court, SD Texas 2014.

The court stated:

The parties agree that there is no genuine issue of material fact. The IRS, as the party seeking an exception to discharge, bears the burden of proof as to nondischargeability. See In re Fields, 926 F.2d 501, 503 (5th Cir.1991). The IRS transcripts show that the IRS prepared substitutes for return in August 1998 based on information contained in debtor's tax returns for 1995 and 1996 filed in June 1998. This evidence indicates cooperation of the tax payer in preparation of a substitute for return under § 6020(a). The IRS has not submitted any evidence that Debtor failed to cooperate in preparation of the substitutes for return for tax years 1995 and 1996. The IRS has not submitted any evidence that the substitutes for return it prepared for debtors tax years 1995 and 1996 fail to meet the statutory requirements of § 6020(a). Under 11 U.S.C.§ 523(a), a substitute for return prepared with the cooperation ofthe taxpayer is a return for dischargeability purposes. See In re McCoy, 666 F.3d 924 (5th Cir. 2012).

It also didn't help the I.R.S. that they had the burden of proof.

So if you can, file all your tax returns, even if you will owe. Failing that, cooperate with the IRS in preparing substitutes for return. If you do that, and you meet all the other requirements to discharge the income taxes in bankruptcy, you should be able to get rid of your personal liabiity for the taxes in a future bankruptcy, if need be.

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