The tax attorneys at Nardone Law Group in Columbus, Ohio, routinely advise individual taxpayers and businesses on how to utilize the Internal Revenue Service’s collection alternatives to manage their federal tax liabilities. If taxpayers are contacted by an IRS revenue officer, it is important to understand that there are various collection alternatives available to resolve federal tax liabilities. Some collection alternatives include: (i) offer-in-compromise; (ii) installment agreements; (iii) currently not collectible status; (iv) discharging taxes in bankruptcy; and (v) challenging the underlying tax liability. It is important to also be aware of circumstances where one of the collection alternatives may not be available. As an example, a taxpayer may lose the option to discharge taxes in bankruptcy if the IRS prepares a substitute return on the taxpayer’s behalf. In our prior article, “Effect of Substitute Returns on Discharge of Debt,” we discussed the criteria for a section 6020(a) substitute return and its effect on the taxpayer’s discharge of debt. The IRS files a 6020(a) return in cooperation with the taxpayer. But, when a taxpayer submits either no information or fraudulent information, the IRS prepares the substitute return under section 6020(b), without the cooperation of the taxpayer. Thus, taxpayer’s should be aware that substitute returns filed under section 6020(b) may negatively affect their ability to discharge debt in bankruptcy.
Substitute Returns Prepared by the IRS
The Bankruptcy Code requires that a return be filed before taxes can be discharged. But, if a taxpayer fails to make and file a return, the IRS may prepare a return for the taxpayer under the following situations:
- If the taxpayer discloses all information necessary for the preparation of the return the IRS will prepare a return under section 6020(a); or
- If the taxpayer has failed to make and file a return, or has filed a false or fraudulent return, the IRS can prepare a return on the basis of the knowledge and information it can obtain through testimony or other means under section 6020(b).
Section 6020(b) is a collection device that the IRS can use to assess and collect unpaid taxes. While Section 6020(b) returns are good for all legal purposes, the Bankruptcy Code specifically states that returns filed under 6020(b) are non-dischargeable regardless of whether the taxpayer later files a return; however, additional amounts reported on returns filed after an assessment on a substitute return are potentially subject to discharge. The following bankruptcy court decision uses 11 U.S.C. § 523, which states that a “return” does not include a return made pursuant to section 6020(b), in conjunction with the test established in Beard v. Commissioner to determine whether the taxpayer’s late filing qualified as a return for purposes of discharging debt.
Taxpayer’s Overdue Filing Reporting Additional Liability was Dischargeable
In the case of In re: Biggers, the Sixth Circuit held that the taxpayer’s liabilities for 2001, 2003, and 2004 were non-dischargeable because: 1) the returns were filed after the IRS had already assessed the federal tax; 2) the returns revealed less tax than the amount assessed by the IRS; and 3) the returns served no tax purpose. The 2002 returns, however, revealed an amount due in excess of the tax assessed by the IRS. The court held that the 2002 return served a tax purpose to the extent that it reported an additional tax liability. The IRS conceded that the excess was dischargeable, although the remainder of the 2002 tax liability was not.
As previously stated, for taxes to be discharged a return must be filed. The court in Beard established a test to determine what qualifies as a return. The court held that for a Form 1040 to qualify as a return: 1) it must purport to be a return; 2) it must be executed under penalty of perjury; 3) it must contain sufficient data to allow calculation of tax; and 4) it must represent and honest and reasonable attempt to satisfy the requirements of the tax law.
In this case the IRS argued that the taxpayer’s late filings satisfied the first three elements of the Beard test, and the only issue was whether the late filing represented “an honest and reasonable attempt to satisfy the requirements of the tax law.” The court then cited United States v. Hindenlang, a Sixth Circuit case, which held that Form 1040 is not a return if it no longer serves any tax purpose or has any effect under the Internal Revenue Code. Further, a return filled too late to have any effect at all under the Internal Revenue Code cannot constitute “an honest and reasonable attempt to satisfy the requirements of the tax law.”
Here the taxpayer’s forms for 2001, 2003, and 2004 all reported a lower liability than the amount originally assessed by the IRS, and therefore served no purpose. However, the tax form from 2002 reported an additional $15,088 in tax liability. Thus, the 2002 tax form served a purpose under the Internal Revenue Code to the extent that it reported additional liability and was therefore subject to discharge.
Contact Nardone Law Group
Nardone Law Group frequently represents individuals and businesses in federal tax matters, including collection alternatives, such as discharging taxes in bankruptcy. If you or your business have been contacted by an IRS revenue officer, or are struggling with tax liabilities, you should contact one of our tax attorneys today. Nardone Law Group’s tax lawyers have vast experience representing clients before the IRS. We will thoroughly review your case to determine what options and alternatives are available to you.