Tax Returns

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”

The District Court for the Middle District of Florida declined to follow the First Circuit’s direction on the 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

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.

On appeal to the Third Circuit, the court, declining to come down on either side of the “one day late” rule, instead applied the pre-BAPCPA analysis set forth in Beard v. Commissioner of Internal Revenue, 82 T.C. 766, 777 (T.C. 1984), aff’d, 793 F.2d 139 (6th Cir. 1986). The court specifically addressed the fourth prong of that test which looks to whether the debtor’s return represents an “honest and reasonable attempt to satisfy the requirements of the tax law.”

The court began with the premise that because a tax return is intended to provide information to the tax authority as to the taxpayer’s tax liability, a return filed after the IRS has already conducted its own assessment will rarely be an “honest and reasonable” attempt to comply with tax laws. The court went on to find that this case was no exception to that general rule.

In so holding, the court rejected Mr. Giacchi’s argument, supported by In re Colsen, 446 F.3d 836 (8th Cir. 2006), that the timing of the filing is not a relevant factor in whether the tax return meets the requirements for discharge, but that the court should look merely at the content of the filing to determine whether it is accurate and complete.

Calling it a self-serving attempt to reduce his liability, the court was also unpersuaded by Mr. Giacchi’s argument that because his late-filed return showed a smaller tax liability than that shown by the IRS assessment, his return was of value to the IRS.

Finally, Mr. Giacchi’s “passing” argument that his “emotional state” should excuse his delinquency likewise garnered no relief from the court. Acknowledging that circumstances could demonstrate a good faith attempt to comply with tax law, Mr. Giacchi’s claim did not provide that excuse.

Giacchi 3rd cir opinion May 2017

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. the 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 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 the luck of the geographical draw.