When is a Tax Return not a Tax Return?

In Re Giacchi, on appeal to the District Court E.D. of Pennsylvania

Good question. The answer can mean a great deal to a debtor trying to discharge a stale tax debt. Mr. Giacchi, hailing from Pennsylvania, sought out bankruptcy protection to try and discharge several years of unpaid tax returns, specifically 2000, 2001 and 2002. For reasons not explained, Giacchi did not file tax returns for those three years. It was only after the IRS examined those years and assessed taxes that Giacchi filed tax returns to report what he argued was the correct amount due. These returns were often filed several years after the original due date of the return; for example, Giacchi’s 2000 tax return was not filed until November 29, 2004 – more than three years after the original due date of April 15, 2001. Even though the returns were not filed on time, in each case, the IRS accepted Giacchi’s returns and adjusted the amount of taxes due to match the tax returns. In spite of this, Giacchi was still unable or unwilling to pay the amount due and in 2010, and again in 2012, he filed for bankruptcy protection.

While in bankruptcy, Giacchi attempted to get out from under his tax liabilities. He argued that while he did not file his return on time, each time he was notified that the IRS assessed a tax against him, he immediately filed a tax return; in fact, the IRS did not contest the returns as filed and adjusted his tax liability to match the returns. The problem for Giacchi, however, was that while he had prepared the correct tax form, with the necessary information to calculate his tax liability, mailed to the correct address and signed under penalty of perjury, what he filed was not, legally speaking, a tax return for bankruptcy purposes.

As a threshold matter, for a tax liability to be dischargeable, the debtor must file a tax return. Seems simple enough. Under the Bankruptcy Code, to meet the definition of a “tax return” a document must:

  • purport to be a tax return;
  • be signed by the taxpayer under penalty of perjury;
  • contain sufficient information to allow the IRS to determine if the proper amount of tax was calculated; and
  • represent an “honest and reasonable” attempt to satisfy the requirements of the tax code.

It is this last requirement that caused Giacchi’s ship to founder. A late filed return, filed post-assessment, is treated as being untimely by the courts; by not filing a return in a timely manner, Giacchi did not show that he was making an “honest and reasonable” attempt to satisfy the tax code, which meant that his tax debts were nondischargeable. The court did leave open the possibility that a debtor who has a good reason to file a late return, filed after an IRS assessment, might still receive a discharge of those taxes. Giacchi, however, failed to provide any excuse for the late filing, beyond stating that by filing his tax returns he reduced his tax liability, which the court rejected as not being a legitimate tax purpose. If, the court noted, the debtor only had to show that the IRS did not correctly calculate his or her tax liability then ” ‘the availability of a discharge would turn on the IRS’s accuracy in assessing taxes, rather than on [the debtor’s] sincerity and diligence in complying with the tax code.’ ”

So the question of whether a tax return is indeed a tax return can make a big difference for a debtor seeking to discharge an old tax debt. While the court did not address whether or not a merely filing a return late, without an IRS assessment, is dischargeable or not, it is clear that waiting to file a return until after the IRS comes a knockin’ can be detrimental to your financial health.