If you intend to discharge your tax debt in bankruptcy, there is an important holding that you should be aware of. If you file your tax return after the IRS has already prepared a substitute return (SFR) on your behalf, your form 1040 does not qualify as a tax return for purposes of bankruptcy.
An SFR is based entirely on information that the IRS received about you from third parties (i.e. your employer). Therefore, the SFR does not include any additional exemptions or expenses that you are entitled to and will therefore overstate your tax liability.
This holding came out of last year's US Bankruptcy Appellate Panel (BAP) 10th circuit case Wogoman vs. IRS. The Wogomans did not file their 2001 tax return by the IRS deadline. In 2004, the IRS began the SFR process and sent the Wogomans a notice of deficiency notifying them of their right to challenge the deficiency in Tax Court within 90 days. The 90 days passed and on February 21, 2005 the IRS assessed the Wogomans for 2001. The Wogomans filed their correct 1040 for 2001 on August 1, 2006. In response, the IRS adjusted the Wogomans' liability and penalties to reflect the amounts on their filed 1040.
Subsequently, the Wogomans filed for bankruptcy attempting to discharge their tax debt.
In deciding this case, the BAP relied on 11 USC 523 (a)(1)(B)(i) which states that a tax debt cannot be discharged in bankruptcy if the tax return, upon which it is based, was not filed. The BAP determined that a return filed after assessment did not qualify as a tax return filed under section 523. The BAP reasoned that "as a matter of law, a Form 1040 is not a return if it no longer serves any tax purpose or has any effect under the IRC." Since the IRS had already assessed the Wogomans with the SFR, their return filed after the fact no longer qualified as an honest attempt to satisfy their obligation to file a tax return.
This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.
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