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Discharging taxes in bankruptcy after a substitute for return

On Behalf of | Jun 24, 2020 | IRS |

You can’t escape from death and taxes. However, you may be able to discharge certain tax liabilities through bankruptcy.

Most tax debt can be discharged if you have filed tax returns for at least two years before seeking bankruptcy protection. However, if the IRS has filed a return on your behalf, it can be difficult to have these tax liabilities discharged.

What is a substitute for return?

If you fail to file a tax return in any given year, the IRS might file a return on your behalf. The IRS will base its data on any information it has regarding your income for that year. The IRS filing is called a substitute for return.

When the substitute for return is complete, the IRS will take note of any unpaid tax liabilities. An assessment will be issued for the outstanding tax debt.

Is a substitute for return a tax return for bankruptcy purposes?

Remember, you have to have filed tax returns to have your tax debt discharged through bankruptcy. If the IRS files a substitute for return on your behalf, and you then decide to file your own return, have you met the requirement for discharging your tax debts? Like most answers to legal questions, it depends.

This is an area of unsettled law. Some circuit courts take a strict approach, holding that any return that isn’t filed on time will not be subject to discharge through bankruptcy. Others consider any filed return to be an adequate return for discharge purposes.

The 9th U.S. Circuit Court of Appeals, which covers California, seems divided against itself. Because there are no clear answers at this point, you should always discuss your options with a legal professional.

Never assume that any and all tax debt is dischargeable through bankruptcy. Even if it’s not possible to have all of your tax debt discharged, you may be able to have your tax liabilities reduced.


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