A troubling trend has now turned into a full-blown minority opinion in the bankruptcy world. Some bankruptcy and appellate courts are reading the Federal Bankruptcy Code to exclude late-filed tax returns from the definition of a “tax return.”
It has long been held that recent income tax debts are not dischargeable in bankruptcy, but older tax debts (that otherwise qualify under the Bankruptcy Code) may be discharged. Some courts, including the First, Fifth, and Tenth Circuit Court of Appeals, now find that changes to the Bankruptcy Code in 2005 exclude certain late-filed returns from discharge. These courts point to a “hanging paragraph” located at the end of Section 523(a) which defines a “return” as a tax filing “that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements).” That paragraph specifies that returns filed by the IRS with debtor cooperation under 6020(a) are “returns,” but those filed by the IRS without debtor cooperation under 6020(b) are not.
Recently the First Circuit in the case of In re Fahey, --- F.3d --- (1st Cir. Feb. 18, 2015), joined other courts in finding that “applicable filing requirements” includes meeting the tax filing deadline. In other words, a late filed return, even by as little as one day past the deadline, is not a “return” and is therefore not a dischargeable debt in either Chapter 7 or Chapter 13.
The First Circuit joins the Fifth Circuit (McCoy v. Mississippi State Tax Comm'n, 666 F.3d 924 (5th Cir. 2012)) and the Tenth Circuit (In re Mallo, 2014 WL 7360130 (10th Cir. Dec. 29, 2014)) in finding that the plain language of the Bankruptcy Code directs this interpretation. Basing its decision on plain language, the Fahey court found that a tax deadline is an “applicable filing requirement,” thereby rendering a return filed outside that time nondischargeable unless filed under 6020(a). The dissent in Fahey points out that permitting only late-filed returns under section 6020(a) absurdly rewards the tax debtor who sits on his hands and awaits IRS invitation to complete the return while punishing the debtor who voluntarily files his own return even one day late.