Navigating the Late Tax Return
Problem in Tax Discharge Cases
By Morgan D. King,
of Morgan King Company & Morgan King Law Offices
Dublin, California
L
ike many issues in consumer
bankruptcy cases, discharging
taxes is both simple and
complicated. The simple part is the 5
rules that must be satisfied to discharge
the taxes and interest on the taxes
(penalties and interest on the penalties
are treated under a different standard).
I won’t re-hash the 5 rules as I have
done that in previous articles. 1
The 3-year and 240 day rules 2 are
comparatively simple. But the other
time-sensitive rule, typically called “the
2-year rule,” presents several tricky
questions, some of them subjective,
that must be addressed.
The 2-year rule prescribes that in
order to be dischargeable, among
other things, the taxpayer must have
filed his/her tax return (or “equivalent”)
more than 2 years prior to filing the
bankruptcy. 3
In many cases, satisfaction of the
2-year rule is simple - the IRS Account
Transcript shows the taxpayer filed
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CONSUMER BANKRUPTCY JOURNAL
his/her 1040 return more than 2 years
before the BK date, where there are
no questions of possible tolling of the
2-year period. 4 The court concluded that
the document was not an
equivalent, nor was it required
to discharge the state tax. 5
However, the validity of a tax return for
discharge purposes requires special
attention. Here is one logical order in
which to address tax return issues for
tax-discharge cases. 3. Timely or late? If required, was
it filed -
a. Timely (that is, filed not later
than the most recent due date
for filing) or filed late? If so, you
can skip down to question # 6.
1. Does it purport to be a tax
“return”? Is the document in
question a tax “return,” or an
“equivalent report or notice?” The
case law has not clarified what,
exactly, an “equivalent report or
notice” is. One case has indicated
that there is a distinction between
a return and an equivalent report,
but did not throw any light on the
distinction.
b. Late - was it filed in the 1st,
5th, or 10th circuits? 6 Those
three circuits have adopted
what is often called “the McCoy
Rule,” which states that a late-
filed return is, by definition, not
a valid tax return. 7 If subject
to the McCoy rule, there are
two exceptions; an “agreed”
return pursuant to 26 U.S.C.
§ 6020(a), or a “… stipulation
to a judgment or a final order
…” 11 U.S.C. § 523(a)(19)(B).
Again, in which circuit it will be
filed is a simple elective.
2. Is it required? Whatever it is
called, is it required to be filed?
This is a simple yes or no.
This question and the first
question above frequently arise
in cases dealing with state tax
reporting requirements, often in
cases where the taxpayer was
supposed to provide the state
with information derived from
an IRS audit. For example, In
re Ciotti, the court struggled
with whether or not Maryland’s
requirement to send a “report”
to the state following an audit
was actually required, and
whether the report in question
was an “equivalent report.”
Spring 2017
4. Not a McCoy circuit. If a non-
McCoy state, meaning any circuit other
than the three listed above, was it filed
before, or after the tax was assessed? 9
One of the time rules is that the
assessment must have happened more
than 240 days prior to the bankruptcy,
but, that rule is not involved here. What
we are looking at here is not whether
the assessment satisfies the 240-day
rule, but rather did the date of the
assessment have a bearing on the
validity of the tax return, and hence the
8
National Association of Consumer Bankruptcy Attorneys