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8TH CIRCUIT SAYS POST-ASSESSMENT RETURNS TRIGGER ELIGIBILITY FOR BANKRUPTCY DISCHARGE

May 04, 2006

The Eighth Circuit court of Appeals has opened up a split in among the U.S. Courts on whether a return filed after an IRS assessment counts in making taxes eligible for discharge under bankruptcy. It adopted the dissenting position recently taken by by Judge Easterbrook in the Seventh Circuit on that issue; the Eighth Circuit now is at odds with the Fouth, Sixth, and Seventh Circuits.

Federal law requires taxpayers to have filed a return to have their taxes discharged in a bankruptcy. If you fail to file, the IRS will prepare a substitute return and assess the tax. These substitute returns use only standard deductions, so they typically assess a higher amount than is actually due; often taxpayers will file a return after assessment to get their taxes down to the correct amount.

The courts until now have upheld the IRS position that returns filed after assessments don't count as "returns" for making a tax liability eligible for discharge. I believe the Eighth Circuit is the first to rule against the IRS on this issue.

Now that the circuits are split, the Supreme Court is likely to settle the issue before too long.

Cite: In re: Gary Wayne Colson, Debtor. (CA-8, No. 05-2476, 5-4-2006)

The Tax Prof features a discussion of the Seventh's Circuit's opinion on this issue, and the Easterbrook Dissent, here.

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