As we enter the last month of tax season, people who owe taxes have to consider their options. I often warn clients that nothing good comes from delaying filing. In addition to the interest and penalty they will have to pay for not paying their taxes on time, they will also need to pay penalties for not filing their tax returns on time. The IRS is very good about entering into payment plans of up to six (6) years. Even the DOR is often open to payment plans. There is usually a deal to be made, even when there is no current ability to pay any taxes.
Unfortunately, the First Circuit Court of Appeals, the appellate court whose jurisdiction includes Massachusetts and New Hampshire, has recently given another reason why people should file their taxes on time. The court held in the consolidated cases of Fahey v. Mass. Dept. of Rev., No. 14-1328; Perkins v. Mass Dept. of Rev., No. 14-1350, Gonzalez v. Mass. Dept. of Rev. No. 14-9002; Brown v. Mass. Dept. of Rev. No. 14-9003 (February 18, 2015) that a tax return filed after the tax filing deadline of April 15 is not a tax return for bankruptcy purposes, and thus the taxes owed for the tax year for which that return was late filed are not dischargeable in bankruptcy, even after the time deadlines that the Bankruptcy Code usually imposes on the discharge of taxes has passed. In other words, if you file your taxes on April 15, but do not pay the taxes, then these taxes can be discharged in bankruptcy in three years. However, if the taxes are filed on April 16, then they can NEVER be discharged in bankruptcy. This specific decision is limited to Massachusetts tax law. However, As this article shows, the other circuits that have addressed this issue have consistently held that late filed taxes cannot be discharged. Until there is disagreement among the circuits, this issue is unlikely to go before the Supreme Court. As such, this decision is likely to remain law in Massachusetts for a long time.
For federal taxes, late filed taxes can be discharged for now. The IRS has not adopted this standard, yet. For now, the IRS is saying that it will allow late filed taxes to be discharged, so long as enough time has past since the filing of the return, and all other rules are complied with. However, there is no guarantee that the IRS will not change its guidelines in the future. Right now, three circuits have held that late filed taxes cannot be discharged, and none have said that they can be discharged. If this trend continues, then the IRS is likely to determine that its late filed taxes cannot be discharged either. As such, if you have old federal income tax debt, now might be a good time to file bankruptcy, before the IRS changes its mind. If you are going to owe taxes this year, but are thinking about not filing on time, because you cannot pay, please understand that you are probably depriving yourself of the most powerful tools out there to get rid of tax debt that you cannot afford to pay.