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Mccoy v. Mississipi – the End of Late Filed Tax Returns? Probably Not

Michael S. Anderson Jan. 13, 2012

About a week ago on January 4, the 5th Circuit Court of appeals in the case “McCoy v. Mississippi State Tax Commission” ruled that a debtor wasn’t entitled to a discharge of state taxes where the tax return was filed late even though it was filed by the taxpayer. In essence, they ruled that a late filed state tax return filed by the taxpayer/debtor is not a “return” for purposes of satisfying the “two year rule” in bankruptcy.

Specifically, the State argued that the debt wasn’t discharged because the return was filed late. The Appeals Court agreed and added that unless a late filed return is filed under a “safe-harbor” provision of the bankruptcy code, a late filed state income tax return is not a return for discharge purposes under Section 523(a) of the bankruptcy code.

This case has raised the interest of many who deal with tax debts and bankruptcy, because to some…it stands for the proposition that a tax return filed one day late i.e. one day after it was legally required to be filed, can never be discharged in a bankruptcy unless it was filed with the aid of the State taxing Agency i.e. IRS.

This line of reasoning has been attempted to some degree before, and in response, the IRS issued at least one notice indicating that “form 1040 is not disqualified as a “return” under section 523(a) solely because it was filed late.” The IRS doesn’t agree that a late filed return should be considered a non return.

So…for now, and at least in the 9th Circuit, the late filed return still qualifies as a return for purposes of discharge in bankruptcy if filed by the taxpayer more than two years before the filing of the bankruptcy case and before the IRS assesses a debt. I don’t think this will change in the future, but just in case…file your tax return on time.