The answer is it depends where you live. The First, Fifth, Tenth Circuits have all adopted the “one-day-late” rule, and now the Eleventh Circuit in Justice v. U.S. (In re Justice), 15-10273 (11th Cir. March 30, 2016) just reached the same result under an alternate theory. The end result is that if a tax return is filed even one day late, the underlying tax debt can never be discharged. This is a departure from the old rule that late filed tax returns are dischargeable if they were otherwise dischargeable and the returns had been filed at least two years prior. For those in North Carolina, which is in the Fourth Circuit the “old rule” still applies, but for how long?
The Fifth Circuit in In re McCoy, 666 F. 3d 924 (5th Cir. 2012) held “unless it is filed under a “safe harbor” provision similar to § 6020(a), a state income tax return that is filed late under the applicable nonbankruptcy state law is not a “return” for bankruptcy discharge purposes under § 523(a).” Whatever the rational the end result is the same: Any debt arising from a late filed tax return is never dischargeable under the bankruptcy code.
The Fourth, Sixth, Seventh, Eighth and Eleventh Circuits, on the other hand, employ the four-part test resulting from a 1984 Tax Court decision known as Beard. Now the Third Circuit in Giacchi v. U.S. (In re Giacchi), 15-3761 (3d Cir. May 5, 2017) has decided to join the majority by adopting the Beard test. In reviewing the issue regarding late filed tax returns, the Third Circuit Court weighed in on the split by differing with the Eighth Circuit and considering the timing of the late filed return as relevant to the question of dischargeability.
With taxes being due later this month it is important to file your tax returns on time or ask for an extension of time to file. One common misconception is that taxes can’t be filed unless you send in a check. Speak with your accountant about an IRS payment plan or simply sending in a return without any payment. Doing so may keep the IRS off your back and start the clock ticking on the usual three year wait period to discharge tax debt in bankruptcy.
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