The Fifth Circuit is, once again, on the cutting edge of denying Debtors a fair shake in Bankruptcy. As a result, this message goes out to everyone in Texas and surrounding states: File your tax returns on time.
The reason this is so important is that the Bankruptcy Code affords relieve for people who owe the IRS money on their personal tax returns. In general, taxes three years old or older, properly filed, without fraud, and without a bunch of delaying moves, appeals, and offers, may be subject to discharge in a Bankruptcy case. The rules are found over a number of statutes and are filled with complicated provisions and look back wording that is daunting to many Bankruptcy lawyers. But there is relief available in many, if not most, personal tax situations.
But, the law in the Fifth Circuit is different than the law in other areas of the county when it comes to tax returns filed late. Taxpayers filing for bankruptcy in the Fifth Circuit must show that they timely filed their returns. Timely includes extensions, so that is not a worry. But, if you are one of those taxpayers who has waited years to file returns and then “get religion” and decide to file, you may have a significant hurdle to obtain discharge.
The law in this area is treacherous. There are things that tax representatives can tell you to do that will prejudice your rights in Bankruptcy. There are things your CPA may tell you that are true and legal under tax law but that may result in disaster down the line in Bankruptcy Court. Anyone having trouble with taxes should remember it is not illegal to be honestly unable to pay your taxes so long as you did not plan on that being the case. File your tax returns timely. You can always amend latter if you act in good faith.