Post-Assessment Tax Filings May Not Be Dischargeable

In a case published by the Ninth Circuit Court of Appeals on July 13, 2016 (No. 14-15857), the Court found that the taxpayer/debtor's attempt to file a very late return was not an honest and reasonable attempt to satisfy the requirements of the tax law and thus, the tax liability was not dischargeable in bankruptcy. In Smith v. United States Internal Revenue Service, the debtor failed to file his 2001 return. In 2006, the IRS prepared its own Substitute for Return showing a $70,662 deficiency owed. The debtor did not timely challenge the deficiency amount and in fact, entered into a payment plan agreement with the IRS. 

Nevertheless, in 2009, the debtor filed his own 2001 tax form indicating "original return to replace SFR." The District Court overruled the Bankruptcy Court's finding that the tax was dischargeable and the Court of Appeals affirmed. The Court of Appeals agreed with the District Court that the debtor's 2009 filing was not "an honest and reasonable attempt to satisfy the requirements of the tax law" as required for the filing to be considered a "return" for purposes of Section 523(a)(1)(B)(i) and thus dischargeable. Following In re Hatton, 220 F.3d 1057 (9th Cir. 2000), the Court found that the Debtor's late acceptance of responsibility for the tax did not meet the "honest and reasonable attempt" standard. As such, the tax debt was not discharged in the debtor's bankruptcy.

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