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The Failure to File Taxes in a Timely Manner May Impact a Taxpayer’s Eligibility for Bankruptcy Discharge

Tax payers who do not pay their taxes on time run the risk of being ineligible for filing a bankruptcy discharge. There are cases where the IRS has argued that tax documents that are only a few days late can render someone ineligible for discharging their debt through bankruptcy. We will take a look at how such a case progressed through the court system.

When the IRS first took this case to bankruptcy court, they argued that the late payments meant the tax debts could not be discharged. However, the court did not find in their favor. The court stated that the fact the taxes were eventually filed in the years in question meant that they were eligible for discharge through bankruptcy.

The IRS proceeded to take this case to the Bankruptcy Appellate Panel. This panel rejected the court’s finding, but they still did not apply the law as literally as the IRS would like. They pointed out that if the law in Section 523(a) was taken literally, a tax payer that was even a day late in their filing would render themselves ineligible for a discharge on those taxes forever. However, the court stated that if the taxpayer submitted the tax return that year, albeit late, or had the fortune of the IRS preparing the return on their behalf, they were entitled to discharges on those taxes.

What the IRS wanted was a situation where tax returns that were not filed on time, meaning the IRS had to make an assessment before the taxpayer filed their taxes, would render those taxes ineligible for good.

However, there are many cases where taxpayers make an honest mistake and do not file their taxes on time. Many of these individuals end up submitting their tax returns after the IRS has already assessed their tax situation from that time period. The court found that those individuals are entitled to get a bankruptcy discharge on that money, as long as they took steps to file those tax returns. This ensures that taxpayers who make an honest effort to take a corrective action are not punished for their initial mistake.

These court cases show that the law regarding late tax filing and related discharges is extremely complicated. If you find yourself facing bankruptcy but are worried about past tax mistakes coming back to haunt you, it is best to speak with a tax attorney immediately.