Category Archives: What Debts Cannot Be Discharged In Bankruptcy

What Should I Do If I Have Unfiled Tax Returns?


You must file the late or unfiled tax return as soon as possible no matter how difficult and unpleasant going through that process is for you. I will be providing a number of reasons below for why it is so important to file tax returns on time, or as soon as humanly possible if you miss the deadline to file the tax return. Filing for an extension kicks the can down the road, but at least you will not miss the deadline or be considered to have an unfiled tax return.

As a bankruptcy attorney I have been part of thousands of bankruptcy cases in one shape or form at this point I am of the opinion that most people do not timely file returns because they will owe a significant amount of taxes. A little known fact is that most of our bankruptcy cases whether Chapter 7, Chapter 13 or Chapter 11 involve taxes that are owed to either the Internal Revenue Service or here in California the Franchise Tax Board. TAXES CAN BE DISCHARGED IN BANKRUPTCY. Almost every celebrity bankruptcy involves unpaid taxes. Read some of my other articles about celebrity bankruptcy cases like actress Teri Polo or actor Gary Busey and on and on. Just Google celebrity bankruptcy and Ryan C. Wood. Not filing a tax return for a year you owe taxes is the single worst thing you can do even if you know you are going to owe taxes that you cannot pay immediately. Even if you are going to owe so much you cannot possibly pay the taxes you still need to file your tax returns on time every time to get the best treatment for repayment. When you do not file a tax return on time it starts a chain of events that are designed to make it extremely difficult to get rid of the taxes owed. Please note there is a statute of limitations for taxes owed to the IRS, but that statute of limitations can be suspended or altered depending upon your circumstances and this article is not addressing issues related to the statute of limitations.

Do not wait to for the IRS to take action.  File your unfiled returns.

Do not wait to for the IRS to take action. File your unfiled returns.

Do Not Ignore Notices From The IRS

First off, yes, life is not easy and for whatever reason you did not file your tax return on time. The IRS will give you notice after notice to file your return on your own. If you ignore these notices this will be a big factor in what I will be wrapping this article up with about Substitute File Returns or an SFR. You will be given all kinds of chances to file a tax return even after the deadline to file the return and pay any taxes owed has long passed. Do not ignore the notices you receive in the mail. You will not get a phone call. You will get notices in the mail that you must read and respond to. I tell client after client that you do not want to be in the pile of files that is for people who are not communicating with the IRS. You want to be in the pile of files for people who are communicating with the IRS and working the problem. I know it is not easy. You have to address the problem sooner than later for someone like me to someday make it all go away forever.

So, Have You Ever Heard of a Substitute Filed Return?

I hope for your sake this is the first time you have heard of this. You do not want this period. A Substitute Filed Return (SFR) is what the IRS puts together as best they can with the information they have to file a tax return on your behalf for a tax year you did not file a tax return for. The IRS will only file a SFR when you have ignored them over and over again. The IRS even knows the numbers they use are not completely accurate. The IRS knows certain deductions will not be made and potentially income not counted. The result is a SFR filed by the IRS on your behalf that everyone knows is not completely accurate, but nonetheless you get assessed the amount of taxes they say you owe in the SFR. Once the taxes on the SFR have been assessed you will then be given more notices about your rights to object to the assessed taxes and correct any errors. Again, do not ignore notices in the mail you receive from the IRS. If you again do nothing you have more or less sealed your fate

Why Substitute Filed Returns Are So Dangerous

In my bankruptcy attorney world SFR’s are very dangerous given the current interpretation of the law and whether the taxes owed and assessed from a SFR are ever dischargeable when filing for bankruptcy protection. You have to understand that when all else fails, us bankruptcy attorneys ultimately clean up the mess once and for all, if the law allows. Long story short you should file a tax return for a year the IRS already filed a SFR on your behalf. You must correct their numbers, add income, add deductions and more or less make the return accurate and the amount of taxes you owe accurate. This could lead to the amount of taxes owed to decrease or increase. But what happens to the taxes owed and assessed from a SFR if you file bankruptcy? As mentioned before taxes absolutely can be discharged when filing bankruptcy if the taxes meet certain requirements. The problem right now is that the Ninth Circuit Court of Appeals agreed with the Internal Revenue Service’s interpretation of what the definition of a “return” is when you file your own return after the IRS files a SFR on your behalf. Let me back up a little. The Bankruptcy Code addresses late filed returns and this is part of the issue I am discussing. Taxes owed for a late filed return can in theory be discharged under the Bankruptcy Code, but the requirements are even more narrow or stringent than when a return is filed on time and there are taxes owed. That is the short of it. So, the definition of what constitutes a “return” under the Bankruptcy Code is the issue. The Ninth Circuit Court of Appeals held that the tax return you file with the correct income, correct deductions and therefore correct amount of taxes actually owed may not be a “return” for bankruptcy purposes given this filed return is not an honest and reasonable attempt to comply with the tax laws since the return was late filed . . . . . . Well, that is unfortunately one way to interpret the law and right now that is it. Let me back up again. So you did not file a return, the IRS filed a SFR on your behalf and assessed you some made up amount of taxes, then you file an accurate return to correct the numbers in the SFR and if and when you seek to discharge these taxes owed according to the accurate return you just filed you may not be able to because the fact that the return was late filed and filed after the SFR has been interpreted that your accurate filed return is not an honest and reasonable attempt to comply with applicable tax laws and therefore not a “return” under the bankruptcy code so the taxes owed for that year cannot be discharged. Did that make sense to you? Let me try again. To allow taxes owed for a late filed return to be discharged when filing bankruptcy there has to be a “return” filed. See Bankruptcy Code §523(a)(1)(B)(i).
All this mess of analysis will take place because you did not timely file your tax return. If you had timely filed that tax return the taxes could easily be discharged when filing for bankruptcy protection, assuming the taxes owed meet the normal requirements to be discharged. The IRS will argue that the SFR assessed taxes will not be part of the “return” you later file that actually has the accurate information. You will forever be in the category of a SFR was filed and now there is an issue as to whether your return filed after the SFR is an honest and reasonable attempt to comply with the applicable tax laws. So far convincing the appellate courts that the later filed return is a “return” under the bankruptcy code has not been very successful. It is truly a fact based analysis on a case by case basis. So, again, file your tax returns on time even if you will owe a lot of taxes and if you miss the deadline to file the return or extended deadline to file the return file your return as soon as you can. Do not let the IRS file a Substitute Filed Return on your behalf.

What Debts Cannot Be Discharged In Bankruptcy?


The good news is that most debts are usually dischargeable.  A discharge eliminates the legal obligation to pay the debt that was discharged and prohibits any and all collection actions to attempt to collect the discharged debt.  The following is a partial list of the common types of debts that are not dischargeable.  This article does not provide information about the differences between a Chapter 7 discharge or Chapter 13 discharge.  Determining which debts cannot be discharged can be complicated.  Please seek counsel regarding your specific circumstances.

Income Taxes

Taxes owed to the Internal Revenue Service and in California, the Franchise Tax Board, are generally not discharged in bankruptcy unless the taxes meet the following requirements.  The income taxes could be discharged if they are three years old, filed on time, accessed 240 days prior to the case being filed , no fraud or willful evasion and returns were filed at least two years prior to the case being filed.

Student Loans

The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act eliminated the discharge of all private and government backed student loans.  Any debt incurred for an educational benefit overpayment, obligation to repay funds received as an educational benefit and debts for any other education loan that is a qualified education loan under the U.S. Bankruptcy Code.  Under certain circumstances student loans could be discharged by filing an adversary proceeding.

Domestic Support Obligations

If you are behind on your child support or spousal support payments as ordered by the state court the missed payments are not dischargeable.

Debts Incurred to Pay Nondischargeable Taxes

As part of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act any debt incurred to pay a nondischargeable tax debt is not discharged.

Damages Caused While Intoxicated

If you caused a car accident and you were intoxicated at the time, any damages or claims resulting from bodily injury of the victims are not dischargeable.  Debts resulting from damage to property caused while you are intoxicated could be discharged.  Any debt for death or personal injury that you caused while intoxicated while operating a motor vehicle, vessel or aircraft are not dischargeable.

Any Money, Property, Services, Credit or Renewal of Credit Obtained by Fraud

If you received money, property, services, credit, renewal of credit or refinancing of credit because you made a false pretense, false representation or actual fraud, the resulting debt of the fraud is not dischargeable.

Purchase of Luxury Items Within 90 Days of Filing Bankruptcy

If you owe $500 or more to a single creditor for the purchase of $500 or more of what is considered luxury goods or services within 90 days before the bankruptcy case was filed the debt is not dischargeable.

Certain Cash Advances

Cash advances that total more than $750 obtained within 70 days before the bankruptcy case was filed are not dischargeable.

Post-Petition HOA Dues

If you own a home in an association and are behind on the monthly dues prior to the bankruptcy case being filed, all of the missed payments before the case is filed are dischargeable.  Once the case is filed the dues that come due each month are not dischargeable.  If you plan on surrendering your home and are not making the normal mortgage payment you will still be responsible for the post-petition HOA dues as long as the house is still in your name.

For more information about which debts are dischargeable, contact our bankruptcy lawyers in the Bay Area or our bankruptcy lawyers in San Francisco.