Discharging Income Taxes in Bankruptcy: Four of Four
By Nicholas Ortiz, Boston Bankruptcy Attorney on Dec 10, 2008 in Tax Issues In Bankruptcy
This past week, I wrote about discharging taxes in bankruptcy and about the three-year, 240-day, and two-year rules. This is the fourth and final installment regarding income tax dischargeability concerning unfiled or fraudulent returns and tax evasion. For an income tax to pass the fourth test, the following must be true:
1. The return must be filed. A substitute return filed by a taxing authority on behalf of a taxpayer is not considered a return for these purposes. There is, however, a split of authority on whether a return filed by a debtor after a substitute return is filed can is considered a return for this test.
2. The return must not be fraudulent.
3. The debtor must not have attempted to evade the tax. Evasion is only found to be present is rare cases and courts disagree on what is deemed to constitute tax evasion for purposes of this test. Generally, evasion is found in cases where a debtor is hiding assets, constructing complicated transactions for tax purposes, or making false and misleading statements to avoid tax. However, evasion has also been found to exist in some cases in which a debtor has simply not paid a tax while having the ability to do so.
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