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“Late Filed Tax Returns Create a Bankruptcy Discharge Problem” By Mary Lopinot

Bankrupt individual taxpayers have long been able to discharge most income tax liabilities in bankruptcy. Under the Bankruptcy Code, most income tax liabilities of individual taxpayers are dischargeable if they did not come due within the last three years and are not the result of tax fraud (subject to a few exceptions). Taxpayers considering bankruptcy should be aware, however, that if you didn’t voluntarily file your tax return on time, you may have lost the ability to discharge your income tax debts in bankruptcy.

In 2005, the Bankruptcy Code was amended to make it more difficult for income tax liabilities to be discharged in bankruptcy. Prior to that, taxpayers could discharge almost all income tax liabilities as long as they were old enough and not resulting from tax fraud. The 2005 Bankruptcy Code amendments made it more difficult to discharge income taxes in various ways, including a provision called the “hanging paragraph.” This basically provides that tax returns have to have been filed in compliance with non-bankruptcy law (i.e., the Tax Code). Over the past few years, federal courts considering whether late-filed tax returns are dischargeable in bankruptcy have come squarely down on the side of the tax authorities when considering the issue; holding this timeliness is an element of filing your tax return to be in compliance with applicable non-bankruptcy law. What that means for you, the taxpayer, is that you have to file your income tax returns on time if you might need to discharge them in the future. Filing one day late can make a difference between discharging taxes in full or having the tax people in your life for the next 10-20 years. It’s something to keep in mind if you don’t have the financial resources to pay your tax bill on April 15.

Mathis, Marifian & Richter, Ltd. provides advice and services to assist you with resolving tax debts and bankruptcy questions. Please contact me at 618-234-9800 for assistance.

Mary E. Lopinot is a shareholder at Mathis, Marifian & Richter (MMR), who focuses her practice in bankruptcy, creditors’ rights, tax litigation, general tax law and criminal tax defense. Mary, who is a registered Certified Public Accountant with the state of Illinois, has extensive experience representing taxpayers before the Internal Revenue Service (IRS) and other administrative agencies.

Professional Services Disclaimer: Please note that the information presented here is as an educational service, and while it contains information about legal issues, it is not legal advice. No warranty is made regarding the applicability of the information presented to a particular client situation, and the information set forth is not a substitute for original legal research, analysis and drafting for a particular client situation.