The tax attorneys at Nardone Law Group, LLC 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. The IRS has broad authority and tools available to collect delinquent taxes, including the ability to file a Notice of Federal Tax Lien or a Notice of Intent to Levy. Therefore, if taxpayers are contacted by an IRS revenue officer, it is important to understand the 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. When a taxpayer elects to discharge taxes in bankruptcy, and they have also failed to file tax returns on time, it is important to understand that there are two provisions in which the IRS can prepare a substitute return. These substitute return provisions may dictate the dischargeability of taxes in bankruptcy.
Substitute Returns under § 6020(a) and § 6020(b)
In limited circumstances, the Secretary of Treasury has the power to prepare or execute tax returns for individual taxpayers. Substitute tax returns can be prepared by the IRS under one of two specific provisions: I.R.C. § 6020(a) and I.R.C. § 6020(b). Section 6020(a) returns are those in which a taxpayer, who has failed to file his or her returns on time, nonetheless discloses all information necessary for the IRS to prepare a substitute return that the taxpayer can then sign and submit. In contrast, a § 6020(b) return is one in which the taxpayer submits either no information or fraudulent information, and the IRS prepares a substitute return based on the best information it can collect independently.
The Bankruptcy Code requires that a return be filed before taxes can be discharged. A Section 6020(a) return satisfies the Code’s requirement, however, a § 6020(b) return does not. Further, returns that do not meet the filing requirements cannot be discharged, unless they fit within the narrow exception of § 6020(a). A recent United States district court decision discussed the necessary criteria for a § 6020(a) return.
NLG Comment: In a later article, we will discuss I.R.C § 6020(b) returns in greater detail.
Taxpayer Failed to Offer Evidence That Substitute Return Was Filed Under I.R.C. § 6020(a)
In Kemendo v. U.S., the United States District Court for the Southern District of Texas remanded the case back to the Bankruptcy Court, declaring that summary judgment in favor of the taxpayer was improper because the taxpayer failed to assert that the substitute returns used by the IRS were prepared under § 6020(a). The issue in this case was whether the substitute tax returns prepared by the IRS in 1998 were done so pursuant to I.R.C § 6020(a), making the tax debts dischargeable, or done so under § 6020(b), making the debts non-dischargeable.
In this case, the taxpayer did not file federal income tax returns for 1995 and 1996 by their due dates, April 15, 1996 and October 15, 1997. In response, the IRS prepared a substitute tax return for both years. The dispute is whether this substitute tax return was prepared under I.R.C. § 6020(a) or § 6020(b).
In 2005 and in 2006 the IRS filed a notice of tax lien for uncollected debts. In 2007, the taxpayer filed for Chapter 13 bankruptcy and received a discharge. In 2013, the IRS issued Notices of Intent to Levy to the taxpayer for unpaid federal income tax liabilities for tax years 1995 and 1996. In response, the taxpayer filed a motion to reopen the bankruptcy case for a determination of whether his 1995 and 1996 tax liabilities were included in the general Chapter 13 discharge.
The Bankruptcy Court granted the taxpayer’s motion for summary judgment and denied the IRS’s motion for summary judgment, after determining that no genuine issue of material fact existed. The parties stipulated that the taxpayer filed late tax returns for 1995 and 1996 in August of 2003. However, the Bankruptcy Court determined that it was undisputed that the taxpayer himself had filed tax returns for 1995 and 1996 on June 19, 1998. The Bankruptcy Court then determined that that taxpayer’s filing of tax returns in June 1998 was evidence of cooperation by the taxpayer in preparation of a substitute return under § 6020(a).
However, the United States District Court determined that the taxpayer never actually asserted that the substitute tax returns used by the IRS were prepared under § 6020(a) or that he filed income tax returns for 1995 and 1996 on June 19, 1998. Although the IRS has the burden of proof regarding non-dischargeabilty at trial, the taxpayer still has the initial burden of informing the Court of the basis for summary judgment.
This Court held that there is a genuine issue of material fact concerning whether the taxpayer filed his 1995 and 1996 tax returns in June 1998. Further, because the Bankruptcy Court’s Order rested on a fact that was genuinely in dispute, summary judgment in favor of the taxpayer was not proper. Therefore, the case was remanded back to the Bankruptcy Court for further proceeding.
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. As the case above illustrates, utilizing a collection alternative often involves stringent substantive and procedural requirements. 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.