The importance of filing one’s tax returns well before filing bankruptcy cannot be stressed enough. This important lesson was reiterated by the First Circuit Court of Appeals in the recent case In re Kriss Terrence, a case appealed from the United States District Court for the District of New Hampshire.
Terrence Kriss failed to file income tax returns when due for 1997 and 2000. He also did not pay the taxes that were owed. In March of 2003, without the benefit of a return the Internal Revenue Service (“IRS”) assessed the tax believed to be due, including penalties and interest, for tax year 1997, in the amount of $30,568. Six months later, it calculated $46,344 in tax, penalties, and interest due for tax year 2000. The IRS then unsuccessfully attempted to collect what was due and owing. Subsequently, in 2007, Kriss filed Forms 1040 for years 1997 and 2000, but did not pay the long-overdue taxes. Five years later, Kriss filed a chapter 13 petition for bankruptcy. After he received a discharge in 2017, Kriss and the IRS joined issue on whether his discharge covered his debts to the IRS for the taxes due for 1997 and 2000. The bankruptcy court held that the tax liabilities relevant here had not been discharged, and the district court affirmed.
Resolution of this issue turned on the interpretation of a rather confusing section of the Bankruptcy Code. 11 U.S.C. § 523(a)(1)(B)(i)–(ii), which provides:
A discharge . . . does not discharge an individual debtor from any debt– – 4 – (1) for a tax or a customs duty– . . . (B) with respect to which a return, or equivalent report or notice, if required– (i) was not filed or given; or (ii) was filed or given after the date on which such return, report, or notice was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition[.]
Until 2005, the Bankruptcy Code did not define “return” for purposes of this section. Then, as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, (“BAPCPA”) Congress added the following unenumerated subsection, denoted as section 523(a):
For purposes of this subsection, the term “return” means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements). Such term includes a return prepared pursuant to section 6020(a) of the Internal Revenue Code of 1986, or similar State or local law, or a written stipulation to a judgment or a final order entered by a nonbankruptcy tribunal, but does not include a return made pursuant to section 6020(b) of the Internal Revenue Code of 1986, or a similar State or local law.
This section required the First Circuit to decide whether Kriss’s returns satisfied “the requirements of applicable nonbankruptcy law (including applicable filing requirements).”
In 2015, the First Circuit decided a case presenting a similar issue in In re Fahey, 779 F.3d 1 (1st Cir. 2015). In that case, the debtor owed Massachusetts income tax. As a result, the First Circuit turned to Massachusetts ztate law as the applicable nonbankruptcy law. That law included a requirement that returns be filed by a specified date. The debtor in that case filed his tax return after that specified date. The First Circuit held that the return was not a “return” within the meaning of section 523(a) otherwise known as the “one-day-late”. The importance of getting an extension from both state and federal governments cannot be emphasized enough here.
However, in the case at hand, the First Circuit did not need to decide whether Fahey applied to the federal returns. The First Circuit stated that at least on its face, Fahey did not control because this was a federal tax issue and not state. Rather, even if Fahey does not control, Kriss “loses because his much belated filings did not qualify as returns under section 523(a) even under the alternative test put forward by Kriss in the bankruptcy court.” See United States v. Lara, 970 F.3d 68, 78 (1st Cir. 2020) (“We – 6 – need not decide which standard applies in this case, as [appellant’s] challenge fails under either standard.”); United States v. Burgos-Montes, 786 F.3d 92, 105 (1st Cir. 2015).
In short, if you are a debtor getting ready to file bankruptcy and you want those taxes discharged via the bankruptcy process, absent very extenuating circumstances which are too enumerated to discuss here, file those tax returns on time when they are due otherwise, you run the very real risk of those “returns” not being considered “returns.”
In re: Kriss, Terrence P. (Kayatta, J.) Appealed from the United States District Court for the District of New Hampshire (Docket No. 21-1206) (Nov. 22, 2022)