Income taxes are dischargeable only if six separate tests are each met.
The Timely-Filed Return Test. 11 U.S.C. § 523(a) prohibits discharge of tax debt in the absence of a return. The First, Fifth, and Tenth Circuits have ruled that a tax, where the return is late, is not dischargeable. This has become known as the “one-day-late” rule. This means that a taxes on a return filed even one day late are not dischargeable. In a 2010 Chief Counsel notice, the IRS declared that a late filed tax return would not bar bankruptcy discharge of the related tax unless the return was filed after an assessment pursuant to § 6020(b) Substitute for Return.1 Nevertheless, the Fifth Circuit has continued to hold that a late-filed return (with the possible exception of a return filed pursuant to I.R.C. § 6020(a)) can never be a “return” for bankruptcy discharge purposes.2
The 3-year tax return due date test. To satisfy this test, the tax return must have been due at least 3 years before the bankruptcy filing.3 For example, if a 2022 tax return was due on April 15, 2023, the bankruptcy petition must be filed after April 15, 2026 for the 2022 income tax to be dischargeable.4 The 3-year lookback period may be suspended by bankruptcy and collection due process appeals.5 Offers in Compromise don’t suspend the 3-year period.6
The 2-year tax return filing date test. To satisfy this test, the tax return must have been filed at least 2 years before the bankruptcy filing. This test will exclude debtors with unfiled returns and certain late-filed returns. For example, if a 2022 tax return was not filed until April 15, 2024, the bankruptcy could not be filed until after April 15, 2026, if the debtor seeks to discharge the 2022 income taxes. Note that the “filing date” in the IRS records may be weeks or even months after the debtor mailed the return to the IRS. The only way to know the IRS filing date is to obtain the tax transcript or account record from the IRS.
A Substitute for Return will not qualify as a tax return for the purposes of this test.7 The IRS also maintains that a tax can’t be discharged if the taxpayer filed the tax return after the IRS assessed a tax deficiency following the taxpayer’s failure to respond to the 90-day deficiency letters based on the IRS’s preparation of a Substitute for Return.8
The assessment date test. For a tax debt to satisfy this test, the IRS must have assessed the tax against the tax debtor at least 240 days before the bankruptcy petition was filed. You can only determine the assessment date by reviewing the IRS tax transcript or account record.9 Generally, assessment is made within 3 years of the tax return’s due date. You don’t want to file a bankruptcy petition before 240 days (with extensions) has run from the assessment. The 240-day period may be extended if the taxpayer filed a prior bankruptcy in which case, the length of the bankruptcy plus 6 months must be added to the time periods.10 Offers in Compromise, collection due process appeals, and Taxpayer Assistance Orders may also toll or increase the time requirements.11
The fraud or willful evasion test. A fraudulent return or a willful attempt to evade or defeat tax will prevent discharge of the tax debt.12 The IRS bears the burden of proof on fraud or evasion.13
The timely notification test. To discharge a tax, the debtor must notify the IRS of the bankruptcy in time for the IRS to file a timely proof of claim.14
- 1Internal Revenue Serv., Chief Counsel Notice, No. CC 2010-016 (Sept. 2, 2010), For a more extensive discussion of a Substitute for Return, see Section 6.2.
- 2See, e.g., In re McCoy, 666 F.3d 924 (5th Cir. 2012) (interpreting post-2005 language of 11 U.S.C. § 523(a)(1)(B)(i)); In re Fahey, 779 F.3d 1 (1st Cir. 2015); In re Mallo, 774 F.3d 1313 (10th Cir. 2014).
- 3For an example of the interplay between the look back periods, see Severo v. Comm’r, 129 T.C. 160 (2007), aff’d, 586 F.3d 1213 (9th Cir. 2009).
- 4See Loving v. United States (In re Loving), No. 11-01439-MAM-7, 2011 WL 3800042 (Bankr. S.D. Ala. Aug. 29, 2011) (taxes not dischargeable because debtor filed on April 8, 3 years after she filed her tax return, but less than 3 years after due date of the return).
- 511 U.S.C. § 507(a)(8).
- 6Chief Counsel Advice 2004-04-049 (Jan. 5, 2004).
- 7Rev. Rul. 2005-59, I.R.B. 2005-37; I.R.M. 4.12.1.8.2. For a more extensive discussion of a Substitute for Return, see Section 6.2.
- 8Internal Revenue Serv., Chief Counsel Notice, No. CC 2010-016 (Sept. 2, 2010), (citing 11 U.S.C. § 523(a)(1)(B)(i)). But see In re Colsen, 446 F.3d 836 (8th Cir. 2006) (under pre-2005 law, return filed after assessment pursuant to “substitute for return” may qualify as a tax return for bankruptcy discharge purposes).
- 9See Effectively Representing Your Client Before the IRS § 17.2 (ABA 8th ed. 2021) (giving information on how to ascertain assessment date).
- 10Severo v. Comm’r, 129 T.C. 160 (2007), aff’d, 586 F.3d 1213 (9th Cir. 2009).
- 11I.R.C. § 507 (a)(8)(A)(ii); I.R.M. 5.9.13.19.3(2) (concept of tolling); see also In re Emerson, 224 B.R. 577 (Bankr. W.D. La. 1998) (appeal of rejected offer in compromise does not toll the 240-day period in I.R.C. § 507).
- 12See, e.g., In re Bruner, 55 F.3d 195 (5th Cir. 1995).
- 13Grogan v. Garner, 498 U.S. 279 (1991).
- 14United States v. Hairopoulos, 118 F.3d 1240 (8th Cir. 1997).