When a Tax Return Is Not a “Return”

A taxpayer who does not comply with IRC § 6020(a) when filing late tax returns could lose the benefit of a bankruptcy discharge of taxes due on those returns. CPAs must be wary of this 2005 amendment to the Bankruptcy Code (USC Title 11) if a client has a history of unfiled returns with taxes due for those periods. The failure to comply with section 6020(a) may have cost the debtor a discharge of a significant tax liability in the recent bankruptcy case In re Links.

Personal income taxes may be discharged in a Chapter 7 bankruptcy when (1) the date a tax return for the period was last due (including extension) was more than three years prior to the date of the bankruptcy filing (Bankruptcy Code §§ 523(a)(1)(A) and 507(a)(8)(A)(i)); (2) no new assessments of tax for the period have been made in the 240 days preceding the filing (Bankruptcy Code §§ 523(a)(1)(A) and 507(a)(8)(A)(ii)); (3) a return was filed for the applicable period more than two years prior to the filing (Bankruptcy Code §§ 523(a)(1)(B)(i) and (ii)); and (4) the debtor did not make a fraudulent return or willfully attempt to evade or defeat such tax (Bankruptcy Code § 523(a)(1)(C)).

In addition, Congress in 2005 inserted an undesignated paragraph to the end of Bankruptcy Code § 523(a), which provides that “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 [IRC] section 6020(a) …” (emphasis added).

IRC § 6020(a) says, “If any person shall fail to make a return required by this title or by regulations prescribed thereunder, but shall consent to disclose all information necessary for the preparation thereof, then, and in that case, the Secretary may prepare such return, which, being signed by such person, may be received by the Secretary as the return of such person.”

In Revenue Ruling 2005-59, the Service said a document prepared by a revenue agent qualifies as a valid return under IRC § 6020(a) if it (1) contains sufficient data to calculate the tax liability, (2) purports to be a return, (3) represents an honest and reasonable attempt to satisfy the requirements of the tax law, and (4) is executed under penalties of perjury (see also, Beard v. Commissioner, 82 TC 766 (1984), aff’d, 793 F.2d 139 (6th Cir. 1986)).

Jeffrey T. Links, a self-employed real estate agent, filed a Chapter 7 bankruptcy petition on April 30, 2007. He owed $120,606 in federal taxes, plus interest and penalties, for 2000 through 2006. He filed an action in the U.S. Bankruptcy Court for the Northern District of Ohio for a dischargeability determination for those taxes. The government sought summary judgment.

The court granted the government summary judgment for tax years 2004, 2005 and 2006 ($44,403 plus interest and penalties) because each period fell within the three-year time frame of Bankruptcy Code § 507(a)(8)(A)(i). For 2000, 2001 and 2003 ($58,625 plus interest and penalties), the IRS argued discharge should be denied because the debtor willfully evaded the taxes. The court denied the motion because willful evasion consists of “both conduct and a mental state element,” and summary judgment is generally inappropriate “when resolution of the substantive claim … requires a determination of a person’s state of mind.”

For 2002, Links did not file his return until April 18, 2004, more than six months after it was due with extensions. Prior to the 2005 amendment, the obligations for the 2002 tax year may have met the dischargeability criteria. In its motion for summary judgment, the government cited In re Creekmore, 401 B.R. 748 (Bankr. N.D. Miss. 2008), which said the phrase “applicable filing requirements” in the amendment to Bankruptcy Code § 523(a) contemplates the requirement that individual taxpayers file an income tax return by April 15 (IRC § 6072(a)) or, with extensions, by Oct. 15 (IRC § 6081). Based on this, Creekmore concluded that, under amended Bankruptcy Code § 523(a), “a late filed return cannot qualify as a return for the purposes of a dischargeability determination.”

Since Links provided no evidence that he complied with the “safe harbor” provision of IRC § 6020(a) when he filed his 2002 return, the court declared the 2002 tax debt ($17,578 plus interest and penalties) nondischargeable.

A recent decision by the Fifth Circuit creates a possible conundrum for taxpayers trying to avail themselves of IRC § 6020(a) in anticipation of a Chapter 7 bankruptcy filing. The court said section 6020(a) allows the IRS to prepare a tax return if a taxpayer fails to file, but a taxpayer cannot compel the IRS to do so (see Westcott v. IRS, docket no. 08-41065, 6/22/09).

By JofA Copy Editor Jeffrey Gilman, Esq.