The tenth circuit U.S. Bankruptcy Appellate Panel, in re Richard J. Wogoman, ruled that federal taxes assessed before a return was filed are not dischargeable. This has serious ramifications for any person with unfiled tax returns, and especially for those who have agreed to, or are looking to solve their problems by agreeing to a substitute for return (SFR).
In general, taxes are discharged in bankruptcy when all of the following conditions are met:
- More than three years have elapsed since the tax return was due, including extensions [11 USC 507(a)(8)(A)(i)]
- The return was prepared more than two years prior to the bankruptcy petition [11 USC 523(a)(1)(B)(ii)]
- The IRS assessment is at least 240 days old (plus certain tolling events) [11 USC 507(a)(8)(A)(ii)]
For those who do not file a return, the IRS can create an SFR using all the information at its disposal and assuming you have the worst filing status with the worst set of deductions. An SFR is not considered to be a return and therefore an SFR would fail the first two tests above.
Initially, the IRS sends out the SFR as a proposed assessment, providing a short window of time for the taxpayer to respond with an actual tax return. Absent a response, or the taxpayer agreeing to the proposed assessment without thought as to its ramifications, the IRS then assesses the tax based on the SFR. The resulting tax from such an assessment is not dischargeable in bankruptcy. This is statutory; there are no relief provisions other than an offer in compromise.
For further information, please contact your Aronson tax professional or Larry Rubin, Aronson’s tax controversy lead partner, at 301.222.8212 if you need assistance or for further information.