June 13, 2017
The Court of Appeals for the Third Circuit in GIACCHI v. U.S., 119 AFTR 2d 2017-733, (CA3 05/05/2017) has held that debts for unpaid taxes from late-filed tax returns are generally not dischargeable in bankruptcy. In so doing, the Third Circuit affirmed prior district court and bankruptcy court decisions, and also came to the same conclusion reached by the Appeals Courts in several other circuits.
Section 727 of the Bankruptcy Code permits the discharge of debts in Chapter 7 bankruptcies, but contains a number of exceptions, including those in Section 523. Section 523 provides that a discharge under section 727 does not discharge an individual debtor from any debt for a tax due with respect to which a return, or equivalent report or notice was not filed or given.
The Courts of Appeal for the First, Fourth, Fifth, Sixth, Seventh, Ninth, Tenth and Eleventh Circuits (as well as several bankruptcy courts) had previously held that an income tax return filed LATE under applicable non-bankruptcy state law is not a return for discharge purposes. However, the Eighth Circuit Court and various bankruptcy courts, had previously held that the “applicable filing requirements” language in section 523 referred to considerations other than timeliness, such as the form and contents of a return.
Bankruptcy courts had adopted a 4-prong test, previously developed in tax matters, to determine whether a document submitted to IRS constituted a “return” for purposes of 11 USC 523(a). The 4-prongs of this test are: (1) the document must purport to be a return; (2) it must be executed under penalty of perjury; (3) it must contain sufficient data to allow calculation of tax; and (4) it must represent an honest and reasonable attempt to satisfy the requirements of the tax law.
In the recent Giacchi case, the taxpayer failed to file Forms 1040 for years 2000, 2001, and 2002 in a timely manner. In 2004, the IRS investigated and assessed a tax liability against the taxpayer for years 2000 and 2001. Sometime after the IRS made those assessments, the taxpayer filed Forms 1040 for 2000 and 2001. Based on information in these late filed forms, the IRS abated a portion of the assessments it had made.
The bankruptcy court concluded that the tax debt in question was non-dischargeable under 11 USC 523 because the taxpayer had failed to timely file tax returns for years 2000, 2001, and 2002, and the taxpayer’s late filed documents were not “returns” within the meaning of section 523 and other applicable law. The district court affirmed and the taxpayer appealed to the Third Circuit Court.
The Third Circuit Court affirmed the district court decision finding that the taxpayer didn’t make an honest and reasonable attempt to file the returns, and therefore his tax liabilities with respect to the returns at issue were not discharged in bankruptcy.
The Third Circuit Court said that forms filed after their due dates and after an IRS assessment rarely, if ever, will qualify as an honest or reasonable attempt to satisfy the tax law. This is because the purpose of a tax return is for the taxpayer to provide information to the government regarding the amount of tax due. If a taxpayer does not file a return, the IRS is required to independently assess the taxpayer’s liability, as it did when the taxpayer failed to timely file his 2000, 2001, or 2002 tax returns. Once IRS assesses the taxpayer’s liability, a subsequent filing can no longer serve the tax return’s purpose and thus could not be an honest and reasonable attempt to comply with the tax law.
The taxpayer in this case made several arguments that his filings constituted tax returns. First, the taxpayer argued that the lateness of his filings did not render them any less an honest and reasonable attempt to comply with tax law, relying on the Eighth Circuit’s prior holding that the “honest and reasonable attempt” inquiry focuses on the content of the form, not the circumstances of its filing. The Third Circuit said that it declined to adopt the Eighth Circuit’s approach and agreed with the weight of authority that the timing of the filing of a tax form is relevant to determining whether the form evinces an honest and reasonable attempt to comply with tax law.
Second, the taxpayer asserted that, because his late-filed forms showed less tax liability and the IRS abated part of the tax assessment based on those filings, the filings served a tax purpose and thus constituted returns. The Third Circuit Court disagreed. The Court stated that the taxpayer failed to provide the IRS the information necessary to determine his tax liability so that IRS had to estimate his taxes. The Court found that the taxpayer’s late filings were merely self-serving bids to reduce his tax liabilities, rather than attempts to comply with the requirements and objectives of timely self-reporting.
The Court of Appeals for the Third Circuit’s recent decision in Giacchi reaffirms that debts for unpaid taxes from late-filed tax returns are generally not dischargeable in bankruptcy. If you have tax debts or are considering filing for bankruptcy, please contact one of our bankruptcy or tax law attorneys at 937-223-1130 or Jsenney@pselaw.com or Jkin@pselaw.com.