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Raleigh Bankruptcy Attorney Explains When a Tax Return Is Not a Tax Return


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If you know the old riddle “When is a door not a door?” you probably also know the answer “When it’s ajar!” So if posed the question “When is a tax return not a tax return?” what would you reply? The answer, at least according to the US Bankruptcy Court, is “When it’s late.” Many might assume that income tax debt is not dischargeable in a Chapter 7 bankruptcy filing, but that’s simply not true.

In fact, many tax debts can be discharged as part of a Chapter 7 bankruptcy if the following circumstances apply:

#1 Taxes must be from over three years prior to the due date of the taxes. For instance 2003 taxes are due in April 2004, so it would be April 2007 before this could possibly be discharged.

#2 Tax returns must have been filed at least two years prior to the bankruptcy. But #1 still trumps this although they seem to be contradictory rules.

#3 Tax must have been assessed for at least 240 days before the bankruptcy filing date. You must also factor in any time that an offer in compromise was pending.

#4 Tax returns must have been filed in good faith with no fraud.

#5 When you filed Chapter 7, it must not have been for the “willful attempt to evade or defeat the tax.”

These rules seem to indicate (to my mind and to many others) that you can file your taxes late, but so long as you meet the above time thresholds, the tax is still eligible for discharge as part of a Chapter 7. But now, a case out of the US District Court for the Southern District of Mississippi has turned all this on its ear and may rewrite how bankruptcy courts treat tax debt.

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When Linda Trenett McCoy filed bankruptcy in Mississippi, she requested that two years of taxes be discharged. The court refused to cancel out the debt because she had filed the tax returns late and the appeal court upheld this ruling. So what drove the court decision?

The court said that under federal law 11 USC § 523 - Exceptions to Discharge – McCoy’s tax returns were not tax returns by law. Under (a)(1)(B)(i) and (ii), it states:

(a) A discharge under section 727, 1141, 1228 (a), 1228 (b), or 1328 (b) of this title does not discharge an individual debtor from any debt—

     (1) for a tax or a customs duty—

          (A) of the kind and for the periods specified in section 507 (a)(3) or 507 (a)(8) of this title, whether             or not a claim for such tax was filed or allowed;

          (B) with respect to which a return, or equivalent report or notice, if required—

               (i) was not filed or given; or

               (ii) was filed or given after the date on which such return, report, or notice was last due, under                      applicable law or under any extension, and after two years before the date of the filing of the                        petition;

The section you need to look at is (ii) above where it says “was filed or given after the date… was last due.” Since McCoy filed late, the court declined to discharge. There were a number of changes to the bankruptcy code made in 2005 one of which included defining what a tax return is and is not. They decided that a tax return is one filed in accordance with the “applicable nonbankruptcy law.” In this case, that means the Mississippi state revenue code.

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So what does this mean for you? What it means is that you should always file your income tax returns by the April 15th due date each year – even if you can’t afford to pay the taxes due. You’ll owe the taxes whether or not you file the return, but if you don’t file a return, the IRS will calculate taxes due but will not take into account any deductions, exemptions or credits you are due. It’s better to file the return yourself.

This way, if you ever end up needing to file Chapter 7 bankruptcy, you can have a shot at having any back taxes discharged along with your other debts. For more information about tax liability and Chapter 7, contact a reputable Raleigh bankruptcy attorney.

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