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Bankruptcy can discharge income tax if certain conditions are met. One required condition is that returns must have been filed. Some bankruptcy courts have recently taken the position that a return filed after the statutory deadline does not qualify as a return for the purpose of a bankruptcy discharge. The bankruptcy court for the northern district of Mississippi noted that new language added to 11 USC §523(a) in 2005 defined “return” for the purpose of bankruptcy. The court said that to qualify as a “return” all elements of nonbankruptcy law must be satisfied. Since tax law requires filing by a specific date, if not filed by that date any tax that is due will be exempt from discharge. This Mississippi decision, In re Creekmore, 401 B. R. 748, went further than most other courts in its interpretation of this new code provision.

The new language was added by Congress in the Bankruptcy Abuse Prevention and Consumer Protection act of 2005 as a separate paragraph without numbering that reads as follows:

For purposes of this subsection, the term “return” means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements). Such term includes a return prepared pursuant to section 6020(a) of the Internal Revenue Code of 1986, or similar State or local law, or a written stipulation to a judgment or a final order entered by a nonbankruptcy tribunal, but does not include a return made pursuant to section 6020(b) of the Internal Revenue Code of 1986, or a similar state or local law.

The process for involuntary assessment made by the IRS under IRC §6020(b) is commonly called “substitute for return”. Tax assessed in this way has long been considered exempt from discharge.

The IRS will generally accept a return that has been prepared voluntarily by the taxpayer whenever it is filed. This is true even after the substitute for return process has resulted in an assessment. However, these delinquent voluntary returns, if filed after the involuntary IRS assessment, may reduce the amount of tax due but do not render the tax dischargeable in most federal circuits. Once the substitute for the return process is complete, the situation can not be reversed and the tax can not be made dischargeable by a subsequent voluntary filing.

After the Creekmore decision, the IRS contested discharge of tax on late-filed returns in several other bankruptcy courts. However, in an abrupt turnabout, the IRS counsel softened its position and began to withdraw its objections to discharge when no substitute for return assessment had been made. Nearly a year later, on September 2, 2010, IRS Office of Chief Counsel Notice CC-2010-016 made the IRS position clear on this issue. In the future, the IRS will only object to the discharge of tax based on a return filed after the statutory due date if tax assessment has already been made by the substitute for the return process under §6020(b).

It appears you can discharge tax due on a late-filed return if you file a return before the IRS makes an involuntary assessment and the tax meets any other requirements for discharge of tax in bankruptcy.

Carolyn Secor is a Clearwater bankruptcy attorney and Clearwater foreclosure attorney serving Palm Harbor, New Port Richey, Oldsmar, Tarpon Springs, Seminole, St. Petersburg, and the Tampa Bay area.

If you would like more information on our practice, please consult our website at or call 727-335-7151.