Faced with the question of whether the debtor’s tax debt based on a late-filed tax return was excepted from discharge, the circuit declined to reexamine its holding in Fahey where it applied the strict “one day late” rule, found the debtor waived his argument in support of an objective test that does not consider timing of filing, and instead, held the debtor’s late-filed tax return did not meet Beard’s subjective test for a “return.” In re Kriss, 21-1206 (1st Cir. Nov. 22, 2022). [Read more…] about First Circuit Dodges Late-Filed Tax Return Issues
Faxed Copies of IRS Tax Adjustments Not a “Return” for Discharge Purposes
The debtor’s faxed copies of the IRS adjustment to his federal taxes did not constitute a “return” within the meaning of section 523(a)’s hanging paragraph because the California law process with which his faxes complied was not “similar” to 26 U.S.C. § 6020(a), which authorizes the IRS to prepare a tax return when a taxpayer fails to do so. Sienega v. Calif. Franchise Tax Bd., No. 20-60047 (9th Cir. Dec. 6, 2021). [Read more…] about Faxed Copies of IRS Tax Adjustments Not a “Return” for Discharge Purposes
Notification to State Tax Board of Federal Tax Reevaluation is Return “Equivalent”
The Ninth Circuit affirmed the opinion of the bankruptcy appellate panel finding that a state-mandated notification to the state taxing authority of a change in the taxpayer’s federal taxes is a “return, or equivalent report or notice,” which, if not filed by the taxpayer, renders the state tax debt nondischargeable under section 523(a)(1)(B). Berkovich v. Cal. Franchise Tax Bd., No 20-60046 (9th Cir. Oct. 14, 2021) (see discussion of In re Berkovich, 619 B.R. 397 (B.A.P. 9th Cir. 2020) here). [Read more…] about Notification to State Tax Board of Federal Tax Reevaluation is Return “Equivalent”
When a Return Is Not a “Return”
A tax return filed four years after it was due and one year after the IRS completed its own independent tax assessment is not dischargeable under section 523(a) because it does not meet the “honest and reasonable” standard set forth in the Beard test for what constitutes a “return.” IRS v. Starling, Nos. 20-7478, 20-7954 (S.D.N.Y. Sept. 16, 2021).
When the debtor failed to file his 2002 federal tax return, the IRS, in 2005, sent a notification of delinquency informing the debtor that it had performed its own assessment on his behalf and providing instructions for the debtor to file his own return, contest the one completed by the IRS, or take other action. Upon receiving no response from the debtor, the IRS finalized its assessment in 2006. In 2007, the debtor filed a return for the 2002 taxes which mirrored the assessment conducted by the IRS.
The debtor then petitioned for chapter 13 bankruptcy and the IRS filed a claim for the delinquent taxes. Upon completion of his plan and discharge, the debtor had paid off only a portion of the 2002 taxes. The IRS, and its private collection agency, ConServe, continued to dun him for the remaining tax debt until the statute of limitations rendered the debt uncollectible. The debtor then filed a motion in the bankruptcy court seeking sanctions against the IRS and ConServe for violation of the discharge order, asserting that the tax debt had been discharged in his bankruptcy. The bankruptcy court agreed, In re Starling, 617 B.R. 208 (Bankr. S.D.N.Y. 2020), and, after the court denied its motion for reconsideration, the IRS and ConServe appealed to the district court. [Read more…] about When a Return Is Not a “Return”
Notification to State Tax Board of Federal Tax Reevaluation is Return “Equivalent”
A state-mandated notification with the state taxing authority of a change in the taxpayer’s federal taxes is a “return, or equivalent report or notice,” which, if not filed by the taxpayer, renders the state tax debt nondischargeable under section 523(a)(1)(B). Berkovich v. Calif. Franchise Tax Bd., No. 20-1025 (B.A.P. 9th Cir. Oct. 5, 2020). [Read more…] about Notification to State Tax Board of Federal Tax Reevaluation is Return “Equivalent”
Tax Debt from Late-Filed Tax Return Dischargeable
The Eleventh Circuit broke with the First, Fifth and Tenth Circuits to find that section “523 does not incorporate a mandatory precondition that a tax return must be timely filed to be dischargeable.” Mass. Dept. of Rev. v. Shek, No. 18-14922 (11th Cir. Jan. 23, 2020).
The debtor filed his 2008 Massachusetts tax return seven months late. Six years later, he filed for chapter 7 bankruptcy in Florida. After discharge, the Massachusetts Department of Revenue commenced collection efforts to collect on the 2008 tax liability. Mr. Shek reopened his bankruptcy seeking to have that debt included in his discharge. Both he and the MDOR filed for summary judgment. The bankruptcy court found that, under the Beard test, section 523(a) did not except Mr. Shek’s tax liability from discharge. The district court affirmed. [blogged here]The MDOR appealed to the Eleventh Circuit. [Read more…] about Tax Debt from Late-Filed Tax Return Dischargeable
Court Applies Beard Test to Late-Filed Return
The District Court for the Middle District of Florida declined to follow the First Circuit’s direction on treatment of tax debts based on late-filed returns, and instead applied the pre-BAPCPA Beard test to find that the debtor’s Massachusetts state tax debt was discharged in bankruptcy. Mass. Dept. of Rev. v. Shek, No. 18-341 (M.D. Fla. Nov. 13, 2018). [Read more…] about Court Applies Beard Test to Late-Filed Return
Third Circuit Applies Beard Test to Late-Filed Return Issue
The Third Circuit entered the late-filed tax return fray and applied the Beard test to the question of whether such return, filed post-IRS assessment, is a “return” for dischargeabilty purposes. It found that, at least in this case, it was not. Giacchi v. United States, No. 15-3761 (3rd. Cir. May 5, 2017).
Thomas Giacchi filed his income tax returns after the IRS had performed an independent assessment. The bankruptcy court found that his return was not a “return” within the meaning of section 523(a)(1)(B) and, therefore, the taxes were non-dischargeable. The district court affirmed. [Read more…] about Third Circuit Applies Beard Test to Late-Filed Return Issue
SCOTUS Declines to Decide Late-Filed Tax Return Issue
The Supreme Court denied cert. in the case of Smith v. I.R.S., No. 16-497 (U.S.) dashing hopes of a definitive resolution of the issue of whether a late-filed tax return may constitute a “return” within the meaning of the hanging paragraph to section 523(a) (petition denied, (Feb. 21, 2017)). As NACBA/NCBRC argued in its amicus brief in support of certiorari, the question has deeply divided the courts with the Eighth Circuit relying on the accuracy of the documents purporting to constitute the return and permitting discharge if a bankruptcy petition is filed two years after a late-filed return, Colsen v. United States (In re Colsen), 446 F.3d 836 (8th Cir. 2006); the Fourth, Sixth, Seventh, Ninth and Eleventh Circuits, finding that once the IRS has made its own assessment of tax liability the late-filed return is not considered a return for purposes of bankruptcy dischargeability, e.g. Smith v. United States (In re Smith), 828 F.3d 1094 (9th Cir. 2016); and the First, Fifth and Tenth Circuits taking the draconian approach epitomized by McCoy v. Mississippi State Tax Comm’n (In re McCoy), 666 F.3d 924 (5th Cir. 2012), that all taxes described on late-filed returns—even those filed one day late for any reason—are barred from discharge. Unfortunately, given the sharp divide between circuits, treatment of a late-filed return will continue to be based on luck of the geographical draw.
“Equivalent Report” Workaround Fails in First Circuit
A late-filed tax return is not an “equivalent report” for purposes of dischargeability. Nilsen v. Mass. Dept. of Rev., No. 16-10148 (D. Mass. Sept. 6, 2016). Johan Nilsen filed several of his state and federal tax returns one to five years late. Neither the IRS nor the state department of revenue had conducted their own assessment of Mr. Nilsen’s taxes prior to his filing. After some of his debts were discharged in chapter 7 bankruptcy, Mr. Nilsen filed an adversary complaint seeking to discharge his tax debts. The bankruptcy court granted the tax authorities’ motion for summary judgment finding that the tax debts were nondischargeable under section 523(a)(1)(B). In re Nilsen, 542 B.R. 640 (Bankr. D. Mass. 2015). [Read more…] about “Equivalent Report” Workaround Fails in First Circuit