Bankruptcy works lots of magic with tax debt, but the magic fizzles out when it comes to SFR’s.
Three times in 10 days, I’ve had to explain to clients that the taxes associated with an IRS Substitute For Return are not dischargeable in bankruptcy.
It doesn’t matter how old the taxes are or how overstated the government’s number.
The 9th Circuit has clearly held that any return filed by a taxpayer after the IRS files an SFR is not a “return” for purposes of bankruptcy law.
I’m haunted by the client who explained that he was too stressed or depressed or distracted to file a return, so he “just let the IRS file the return.”
The taxes associated with the SFR would be fully dischargeable in bankruptcy when we met, had he only filed a return. Now he has to wait out the IRS collection statute of 10 years from assessment.
One of bankruptcy’s greatest “tricks” is wiping out taxes long before the statute of limitations runs.
Applied to income taxes, bankruptcy allows the discharge of taxes, for which a return was filed, if the return was last due without penalty more than three years before the bankruptcy is filed.
The two other requirements are that if the return wasn’t filed on time, that it have been on file for at least two years, and the tax in question assessed more than 240 days before filing.
So, the first requirement for discharge is that a return was filed.
If it’s an SFR, it’s not a return.
Taxes die of old age
If there is good news here, it is that taxes assessed pursuant to an SFR are then subject to the same statute of limitations as regularly filed taxes.
As well, the statute can be extended by various tolling events. Dense discussion of tolling events , starting at page six.
The bad news, experienced by one of my clients, is that the IRS can extend the collectability of a tax by seeking a judgment.
Note, too, that if neither a regular return nor an SFR is filed, the statute of limitations never starts running.
Get documents to file taxes
If you haven’t filed tax returns because you don’t have the necessary documents about your income and expenses for a past year, help is available.
Help, in fact, from the IRS.
You can order a transcript from the IRS that shows the information about that tax year that has been reported by others to the IRS.
Use that information, plus anything else you have, to do your best to file the return.
It’s a race to see if you get a return filed before the IRS files a substitute for return.
The good news is that the IRS gives you lots of notice that they haven’t gotten a return. You get lots of warning that you are at risk of suffering an SFR.
Heed the warning, and keep your tax options open.