When is a tax return not a tax return?

For most taxpayers, the tax year is a calendar year ending on December 31st. The tax return due date is the 15th day of the fourth month following the end of the tax year, or April 15th. Sometimes holidays affect that date, so it may be extended by one or more days, but generally it is April 15th. These dates are governed by United States Code: Title 26, which specifies them. The code also allows a 6-month extension to file a tax return without penalty, provided the tax has been paid in accordance with the guidelines and the extension is filed timely. The deadline for filing the extension is generally October 15th.

Since we know when a tax return should be filed, what is a tax return? This question has been answered many times in the United States Tax Court system (USTC), citing numerous code sections in its opinions. Generally, however, a return is defined as a means of providing information “…with such uniformity, completeness, and arrangement that the physical task of handling and verifying returns may be readily accomplished.” In other words, the IRS is empowered to specify the forms we taxpayers should use to make a valid and timely tax return. This was generally the result of “tax protestors” creating their own forms to use for returns.

Every year, many taxpayers who either forgot, didn’t think they needed to file, are tax protestors, or have another reason simply don’t file a return. In fact, about 11.6% of people who should file a return don’t. The Voluntary Filing Rate (VFR) is computed by the IRS every year and tracks “elusive” non-filers. The reason is that sometimes the IRS computes returns using ASFR (Automatic Substitute for Return) or a more manual method, simply called SFR (Substitute for Return). As we will soon learn, these two programs can be very important.

In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Act (BAPCPA), which was subsequently signed into law by then-President George Bush. This law was intended to reform the bankruptcy laws and the tax system, and it had a profound impact on taxpayers. Until then, a taxpayer with unpaid taxes 3 years old or older could petition the bankruptcy court to have the liability discharged. However, no tax debt can be discharged for a return that was never filed. So, while the IRS can assess a tax liability, it does not need a return to do so. The IRS held that if such an assessment was made without the benefit of a return, any subsequently filed return was, in reality, no return at all. This was a widely held and supported position of the bankruptcy and tax courts. With the passage of BAPCPA, a “hanging” paragraph was added to the tax code, stipulating that for a return to be accepted as a “tax return,” it had to be filed in accordance with “applicable filing requirements.” The only exception was for a return made pursuant to section 6020(b). In other words — and according to literal interpretations — if a tax return was even 1 minute late past midnight on April 15th, the return could not be considered timely. Any late-filed return resulting in a tax liability was not eligible for relief in a bankruptcy court. In other words, the tax debt could not be discharged in bankruptcy. The only exception that might allow dischargeability was under code section 6020(b). That is, if the IRS performed a Substitute for Return, it might be allowed for consideration by the bankruptcy court.

Many courts, including Courts of Appeal, have defined a return as one that is timely filed under Section 6072. In other words, courts have routinely taken a literal view of the new BAPCPA code section and concluded that untimely returns — returns filed after the due date — are not returns at all for purposes of the nondischargeability statute. These decisions have been rendered in Fahey v. Massachusetts Dep’t of Revenue; Mallo; McCoy v. Miss. State Tax Comm’n, and others. However, as a result of these rather harsh decisions, the IRS has declined to adopt a one-day-late policy, instead opting to wait until an assessment has been made.

“The IRS candidly disclosed its reluctance to advocate for the one-day-late result, stating, “The United States does not adopt this position, which creates a harsh result that appears inconsistent with the statute’s intent.” Def.’s Mem. Supp. Summ. J. 12:20–21, July 30, 2013, ECF No. 47.” Martin v. Internal Revenue Serv. (In re Martin), 508 B.R. 717, 727 n.14 (Bankr. E.D. Cal. 2014)

In 2016, the Ninth Circuit Court of Appeals took issue with earlier, literal interpretations of the “hanging paragraph,” so the discussion of the dischargeability of tax debt is likely to continue for some time; perhaps even reaching the Supreme Court, unless the code is modified by the US Congress. We’ll have to wait and see. One thing is sure, it is very important to file an income tax return on time and thereby avoid the entire controversy.