Archive for January, 2012

Can I Discharge Tax on Late Filed Returns?

Monday, January 16th, 2012

Article by

Kent Anderson, Oregon Bankruptcy Attorney

Is it a Return? Bankruptcy can discharge income tax if certain conditions are met. One required condition is that returns must have been filed. Some bankruptcy courts have recently taken the position that a return filed after the statutory deadline does not qualify as a return for the purpose of bankruptcy discharge. The bankruptcy court for the northern district of Mississippi noted that new language added to 11 USC §523(a) in 2005 defined “return” for the purpose of bankruptcy. The court said that to qualify as a “return” all elements of nonbankruptcy law must be satisfied. Since tax law requires filing by a specific date, if not filed by that date any tax that is due will be exempt from discharge. This Mississippi decision, In re Creekmore, 401 B. R. 748, went further than most other courts in its interpretation of this new code provision.

The new language was added by congress in the Bankruptcy Abuse Prevention and Consumer Protection act of 2005 as a separate paragraph without numbering that reads as follows:

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.

The process for involuntary assessment made by the IRS under IRC §6020(b) is commonly called “substitute for return”. Tax assessed in this way has long been considered exempt from discharge.

The IRS will generally accept a return that has been prepared voluntarily by the taxpayer whenever it is filed. This is true even after the substitute for return process has resulted in an assessment. However, these delinquent voluntary returns, if filed after the involuntary IRS assessment, may reduce the amount of tax due but do not render the tax dischargeable in most federal circuits. Once the substitute for return process is complete, the situation can not be reversed and the tax can not be made dischargeable by a subsequent voluntary filing.

After the Creekmore decision, the IRS contested discharge of tax on late filed returns in several other bankruptcy courts. However, in an abrupt turnabout, IRS counsel softened its position and began to withdraw its objections to discharge when no substitute for return assessment had been made.  Nearly a year later, on September 2, 2010, IRS Office of Chief Counsel Notice CC-2010-016 made  the IRS position clear on this issue. In the future, the IRS will only object to discharge of tax based on a return filed after the statutory due date if tax assessment has already been made by the  substitute for return process under §6020(b).

It appears you can discharge tax due on a late filed return if you file a return before the IRS makes an involuntary assessment and the tax meets any other requirements for discharge of tax in bankruptcy.

Carolyn Secor is a Clearwater bankruptcy attorney and Clearwater foreclosure attorney serving Palm Harbor, New Port Richey, Oldsmar, Tarpon Springs, Seminole, St. Petersburg and the Tampa Bay area.

If you would like more information on our practice, please consult our website at:
or call (727) 254-1704.

Will I Lose My Security Clearance If I File For Bankruptcy?

Monday, January 2nd, 2012

Will I Lose My Security Clearance If I File For Bankruptcy?
by Kevin Gipson, New Orleans Bankruptcy Attorney

“Can I lose my security clearance if I file for bankruptcy?

This is a question that I often hear from members of the Armed Forces, employees of the Transportation Security Administration and others in Federal service or employment.

In my experience, the answer is No!

In fact, I have had a number of occasions over the years where people seeking employment with the TSA or a promotion have been told to go file for bankruptcy.  I have also had people in military service that have not only not lost their security clearance because of a bankruptcy, but have actually received promotions during or after filing


Because a person in dire financial straits is at risk of making a poor decision such as taking a bribe in an effort to get out of debt.  Since a Chapter 7  can get rid of most debt, and a Chapter 13 can allow the debt to be paid out in a reasonable manner, the motivation to make an unwise decision is gone.

But you don’t have to take my word for it,  Here is what the United States Air Force Academy Legal Office says about bankruptcy:

“The status of your security clearance can be affected, but it is not automatic. The outcome depends on the circumstances that led up to the bankruptcy and a number of other factors, such as your job performance and relationship with your chain of command. The security section will weigh whether the bankruptcy was caused primarily by an unexpected event, such as medical bills following a serious accident, or by financial irresponsibility. The security section may also consider the recommendations and comments of your chain of command and co-workers. This is an issue that can be argued both ways, so as a practical matter your security clearance probably should not be a significant factor in making your decision about whether to file bankruptcy. The amount of your unpaid debts, by itself, may jeopardize your clearance, even if you don’t file bankruptcy. In that sense, not filing for bankruptcy may make you more of a security risk due to the size of your outstanding debts. By the same token, using a government approved means of dealing with your debts may actually be viewed as an indication of financial responsibility. Eliminating your debts through bankruptcy may make you less of a security risk. There is no hard and fast answer there, with one exception: It never hurts to have a good reputation with your co-workers and your chain of command.”

In other words, filing bankruptcy is not the reason a security clearance is revoked. A more important issue is how your debts were incurred. For example, debts incurred from gambling or consistently living beyond your means are heavily frowned upon. Debts from circumstances outside your control, such as a job loss due to the economy, decreased household income because of a divorce, or large expenses for medical treatment are more easily mitigated.

Finally, I would note that section 525 of the Bankruptcy Code states that:

“…(A) governmental unit may not deny revoke, suspend or refuse to renew a license, permit, charter, franchise or other similar grant to, condition such a grant to, discriminate with respect to such a grant against, deny employment to, terminate the employment of, or discriminate with respect to employment against, a person that is or has been a debtor under the Bankruptcy Code solely because the debtor has been a debtor under the Bankruptcy Code.”

Carolyn Secor is a Clearwater bankruptcy attorney and Clearwater foreclosure attorney serving Palm Harbor, New Port Richey, Oldsmar, Tarpon Springs, Seminole, St. Petersburg and the Tampa Bay area.

If you would like more information on our practice, please consult our website at:
or call (727) 254-1704.