NAVIGATING THE LATE TAX RETURN PROBLEM
dischargeability of the tax?
In most non-McCoy cases, the distinction is important.
a. If filed late but before the assessment, the weight of authority is that it is a valid tax return and the IRS typically acquiesces to the validity of the return. 10 The argument arises if the return was filed after the assessment.
b. If filed after the assessment, then the Beard rule 11 applies- applying the Beard test, did the circumstances“ represent an honest and reasonable attempt to satisfy the requirements of the tax law?”
i. If it satisfies Beard, it will probably be deemed a valid return. 12 Skip to question # 5.
ii. If not, then the return is invalid and the tax is not dischargeable. 13
Whether the circumstances of a postassessment filing rise to the level of“ honest and reasonable attempt” is quite subjective, and, typically, counsel will not be able to assure the client of a favorable outcome.
The facts and circumstances that the debtor could argue to support his or her“ honest attempt” are probably infinite, and the author has found no case that summarizes what these might be. Some of the circumstances considered for or against a finding of honest attempt include the taxpayers hiring an accountant to prepare the returns, the honesty and completeness of the returns, the length of delay after the assessment for filing the return(“ extraordinary tardiness,” Johnson v. U. S.( Bankr. S. D. Fla. 2016)), the debtor’ s unemployment, disability, or illness, the debtor’ s drug addiction resulting in incapacity, post-office error, and failure to inform the IRS of a change of address.
5. Two years ago. If it satisfies the Beard test, was it filed more than 2 years ago? 14
a. Yes
b. If not, it will not satisfy the 2-year rule until the filing date is over 2 years back( or later if subject to tolling; see remarks below).
6. Tolling. If the return was filed more than two calendar years ago, was the 2-year period from the date the return was filed tolled or suspended by a prior bankruptcy, an IRS Collection Due Process appeal, or an offer-incompromise that prevented the taxing entity collection activities( primarily, levy)? In such event the 2-year period may be suspended for the time the event prohibits collection, plus an additional 90 days. 15
The Bankruptcy Code includes tolling events that apply only to the 3-year and the 240-day periods( see hanging paragraph attached to 11 U. S. C. § 507( a)( 1)( G)), but does not include tolling of the 2-year period. However, there have been several cases that have imposed tolling of the 2-year period on the theory of equitable tolling. 16 With so few cases addressing the issue it is very difficult to predict how it will be handled by IRS insolvency.
7. Fraud? If the 2-year period is satisfied, was the return fraudulent or the taxpayer guilty of attempted tax evasion? 17 In the author’ s experience the IRS typically tosses a suspected fraudulent return into the category of tax evasion. Tax evasion or attempted tax evasion has been rare in the author’ s experience.
In meetings with one client, the author was satisfied that the taxes met all the rules for discharge. The client left with a big smile. A few minutes later he came back, looking a bit sheepish and accompanied by his wife who had been out in the hall. She said there was something her husband wanted to tell me. She looked sternly at him. He said there was something I might want to know; he had punched an IRS officer in the face, and then filed two fake liens against him. Would that make any difference, he asked. This called for another, longer, conference with the client.
Conclusion
In cases that look as though they may involve some of these questions, the author suggests you use a checklist based on the sequence shown here. You may want to use one of the online transcript analysis sources such as Pitbull’ s transcript service. Better yet, consult with the author. 18
( Endnotes)
1 One can get up to speed on these rules by getting the author’ s book, Discharging Taxes in Consumer Bankruptcy Cases, at KingLawPublishing. com( aka BankruptcyBooks. com). 2 11 U. S. C. § 507( a)( 8)( A)( i) and( ii), and( a)( 8)( G). 3 11 U. S. C. § 523( a)( 1)( B)( ii). 4 For those who are into reading IRS Account Transcripts to identity important dates, note that the entry appearing on the transcript with code“ 150,” the words,“ Tax return filed and tax assessed and a date” is not the date the tax return was filed; the actual filing date appears just above code 150,“ Return due date or return received date, whichever is later.” This is the date either the taxpayer’ s 1040, or the IRS Substitute for Return was filed. 5 In re Ciotti, Case No. 07- 13229-JS( Bankr. Md. 9 / 11 / 2009)( Bankr. Md., 2009)(“ The“ report of federal adjustment” required by
National Association of Consumer Bankruptcy Attorneys Spring 2017 CONSUMER BANKRUPTCY JOURNAL 15