File your tax returns before the IRS does a tax assessment, or you could lose your right to discharge taxes

Income taxes may sometimes be discharged in a personal bankruptcy without full payment of the tax. For example, this might be true if the return is timely filed and more than three years have gone by since the last due date for the return, or if the return were filed late and more than 2 years have gone by. But, waiting too long can have dire results as Thomas Giacchi found out the hard way.

Mr. Giacchi did not file his 2000-2002 federal tax returns until after the IRS had estimated and assessed his taxes for those years, without his help. Only then did he file late returns, which showed he owed less than what the IRS estimated. He filed a Chapter 7 bankruptcy more than 3 years after his returns were filed and got a discharge. He then went back to bankruptcy court and filed suit asking the bankruptcy court to rule that his taxes for those years were discharge. He lost, and on appeal the Third Circuit Court of Appeals agreed.

The problem for Mr. Giacchi is that for a bankruptcy discharge he had to have filed a return that represented “an honest and reasonable effort to comply with the tax law”. Following other circuit courts of appeal, the Third Circuit held that filing a return after the IRS had already gone to the trouble of calculating his tax did not meet this test. Under the tax laws, “the purpose of a tax return is for the taxpayer to provide information to the government regarding the amount of tax due”  and once the IRS has to calculate the tax due without this assistance, a later tax return is no longer an “honest and reasonable attempt to comply”

If only Mr. Giacchi had filed sooner, he might have been able to discharge the old tax liabilities.

A word to the wise: file before the IRS catches up to you.

While we are not tax attorneys or qualified to give tax advice, we recommend not ignoring tax obligations.

[IRS CIRCULAR 230 DISCLOSURE:  Pursuant to Treasury Regulations, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used or relied upon by you or any other person, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax advice addressed herein]

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