SFR Substitute for Return Page SFR Substitute for Return Page Don Fitch CPA CITP (877)CPA-Help or (877)272-4357 Website www.Paylesstax.com

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SUBSTITUTE FOR RETURNS (SFR'D)
EXCEPTION TO DISCHARGE
UNFILED RETURNS AND LATE RETURNS

Bankruptcy Code Section 523(a)(1)(B) excepts from discharge any tax debt "with respect to which a return, if required, was either not filed or was filed after the date on which the return was last due after two years before the date of the filing of the petition." Application of this statute depends primarily on the meaning "return" and "filed" -- neither of which is defined in the Bankruptcy Code. Under applicable tax law, a return is generally recognized as a document or magnetic media that:

(1) is on a proper form;

(2) discloses sufficient income, deduction, and credit information to compute the tax; Germantown Trust Co. v. Commissioner, 309 U.S. 304 (1939)

(3) is for a proper accounting period; Code Section 441

(4) employs a proper method of accounting; Code Section 446 and

(5) is properly executed. Code Section 6065. Lucas v.
Pilliod Lumber Co., 281 U.S. 245 (1930)

Whether an IRS-prepared, so-called substitute for return qualifies as a return for purposes of the Bankruptcy Code has been the subject of some controversy and a good deal of litigation. In general, if under Code Section 6020(b), a non-filer has a return prepared for him, without his knowledge, consent, or signature, the majority of courts have held that
the return does not constitute a valid return for bankruptcy discharge purposes. Thus, the debtor will not be considered to have filed returns and will not be able to seek a discharge of the unpaid taxes stemming from the unfiled returns. These courts note that the authority of the IRS to prepare a return on behalf of a non-filing taxpayer is an administrative mechanism by which the IRS may pursue collection and does
not obviate the taxpayer's obligation to file a return. These courts also note that the legislative history of Bankruptcy Code Section 523(a)(1)(B) makes clear that Congress intended that only tax debts for which the debtor actually filed a return are to be discharged and that any other interpretation would encourage the non-filing of returns. However, if
under Code Section 6020(a), a non-filer meets with the IRS, signs a form containing sufficient information to calculate his or her tax liability, admits to owing the tax, and consents to the assessment, a number of courts have recognized the form as a "filed return" within the meaning of Bankruptcy Code Section 523(a)(1)(B).

EXAMPLE: Rhonda failed to file a return for 1990. In April 1995, she met with an IRS agent and informed him that she did not have sufficient information with which to prepare her 1990 return. On August 31, 1996, the agent presented her with a pro-forma tax return showing a liability and Form 1902-B, Report of Individual Income Tax Examination Changes. Rhonda signed the documents and returned them to
the agent. On September 15, 1998, she filed a voluntary bankruptcy petition. The 1990 tax liability is dischargeable because the pro-forma return and Form 1902-B signed by Rhonda are treated as a return filed more than two years from the date the bankruptcy case commenced.