Can I Discharge Tax on Late Filed Returns?

Bankruptcy can discharge income tax if certain conditions are met. One required condition is that returns must have been filed. Since tax law requires filing by a specific date, if not filed by that date any tax that is due will be exempt from discharge.

The new language was added by congress in the Bankruptcy Abuse Prevention and Consumer Protection act of 2005 as a separate paragraph without numbering that reads as follows:

“For purposes of this subsection, 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 section 6020(a) of the Internal Revenue Code of 1986, or similar State or local law, or a written stipulation to a judgment or a final order entered by a nonbankruptcy tribunal, but does not include a return made pursuant to section 6020(b) of the Internal Revenue Code of 1986, or a similar State or local law”.

The process for involuntary assessment made by the IRS under IRC §6020(b) is commonly called “substitute for return”. Tax assessed in this way has long been considered exempt from discharge.

The IRS will generally accept a return that has been prepared voluntarily by the taxpayer whenever it is filed. This is true even after the substitute for return process has resulted in an assessment. However, these delinquent voluntary returns, if filed after the involuntary IRS assessment, may reduce the amount of tax due but do not render the tax dischargeable in most federal circuits. Once the substitute for return process is complete, the situation cannot be reversed and the tax cannot be made dischargeable by a subsequent voluntary filing.

It appears you can discharge tax due on a late filed return if you file a return before the IRS makes an involuntary assessment and the tax meets any other requirements for discharge of tax in bankruptcy.