10th Circuit Rules: No Tax Discharge in Bankruptcy If You File a Late Return

The 10th Circuit Court of Appeals recently ruled that if a bankruptcy debtor files a “late” income tax return, the underlying income tax debt cannot be discharged in Chapter 7 bankruptcy even if the debtor meets the other criteria for discharging tax debt in bankruptcy.

The Criteria for Discharging Income Taxes in Bankruptcy

Although many income tax debts are not dischargeable in bankruptcy, you can discharge a tax debt if it meets the following criteria:

  • The tax debt is for federal or state income taxes.
  • The tax return was due at least three years ago (this includes all valid extensions).
  • You filed the return at least two years ago.(This is where the “late filed” return issue arises, see below.)
  • The taxes were assessed at least 240 days ago.
  • You did not file a fraudulent frivolous return and you are not evading tax laws.

(To learn more, see Tax Debts in Chapter 7 Bankruptcy.)

The Split in Authority

According to most bankruptcy courts, a late-filed return does not constitute a “return” for purposes of the third prong in the above criteria for discharging tax debt.

What is a late return? Your return is “late” if all of your filing extensions have expired and the IRS has filed a substitute return without your assistance. Your return is not late if the IRS files a substitute return with your assistance under Internal Revenue Code Section 6020(a) — something the IRS may, but is not obligated, to do.

However, some courts have found otherwise:  That a late return is still a “return” for the purposes of the third prong. This means that if you filed a late return at least two years before your bankruptcy and meet the other criteria, you can discharge the underlying tax debt.

The 10th Circuit Decision: In re Mallo

In a recent decision, the 10th Circuit Court of Appeals embraced the first line of authority:  That is, a late filed return does not constitute a “return” for purposes of the bankruptcy dischargeability test. In re Mallo, No. 13-1464, 2014 WL 7360130 (10th Cir. Dec. 29, 2014). The 10th Circuit did say that if the IRS files a return with your assistance under IRC Section 6020(a), then the return does count as a “return” for the third prong of the test.

This case may go to the U.S. Supreme Court; we’ll keep you posted.  In the meantime, if you have income taxes you’d like to discharge in bankruptcy, be sure to speak with a local bankruptcy attorney.