Available at: https://engagedscholarship.csuohio.edu/cgi/viewcontent.cgi?article=4364&context=clevstlrev
Abstract:
This Note examines the circuit split over the dischargeability of tax debts tied to late-filed returns, which has led to inconsistent bankruptcy outcomes and inequitable treatment of debtors across jurisdictions. Some courts, adopting the strict “one-day-late” rule, hold that any tax return filed even a single day past its deadline is not a “return” for bankruptcy discharge purposes, permanently barring relief. Others apply a more flexible standard grounded in the Beard test, considering a debtor’s good-faith compliance efforts. This inconsistency contradicts the fresh start principle of bankruptcy law, disproportionately harms low-income debtors, and fails to serve the government’s tax collection interests. This Note argues that Congress should amend 11 U.S.C. § 523(a)(1)(B) to codify the Beard test and restore the effectiveness of the two-year rule, ensuring that bankruptcy law does not impose lifelong financial penalties for minor procedural missteps. Alternatively, the Supreme Court should establish a uniform standard, or the IRS should issue administrative guidance clarifying that a late-filed return remains valid for tax assessment and discharge purposes. A clear, consistent, and fair approach is necessary to resolve this issue and restore uniformity, predictability, and economic rationality to tax dischargeability in bankruptcy.
The Taxing Ambiguity: When Is a “Return” Not a Return?
Elizabeth Tsai’s recent note in the Cleveland State Law Review tackles one of the most persistent interpretive problems created by the 2005 amendments to the Bankruptcy Code: whether a late-filed tax return can ever qualify as a “return” for purposes of discharging tax debt under 11 U.S.C. § 523(a)(1)(B).
The problem arises from the BAPCPA addition of the so-called “hanging paragraph,” which defines a “return” as one that satisfies “applicable filing requirements.” Courts have divided sharply on whether those requirements include timeliness.
The result is a deep circuit split that leaves debtors’ ability to discharge tax debt largely dependent on geography.
The Competing Approaches
The Strict “One-Day-Late” Rule
Several circuits have adopted a strict interpretation holding that any late return is not a return at all for bankruptcy discharge purposes.
Those courts reason that:
- “Applicable filing requirements” include the deadline, and
- A return filed after that deadline fails the statutory definition.
This approach is reflected in decisions such as:
- Fahey v. Massachusetts Department of Revenue (1st Cir.)
- In re McCoy (5th Cir.)
- In re Mallo (10th Cir.)
Under this rule, missing the tax filing deadline by even one day permanently bars discharge of the associated tax debt.
Critics point out the obvious statutory problem: if no late return is ever a “return,” then the Bankruptcy Code’s two-year rule for late-filed returns becomes meaningless.
The Beard Test Approach
Other circuits take a far more practical approach, applying the long-standing Beard test to determine whether a document qualifies as a return.
Under Beard, a return must:
- Purport to be a return
- Be signed under penalty of perjury
- Contain sufficient information to calculate the tax
- Represent an honest and reasonable attempt to comply with tax law.
Courts using this approach focus on substance rather than timing.
Late returns may still qualify as returns so long as they represent a genuine effort to comply with tax law.
The Fourth Circuit: A Middle Ground Favorable to Debtors
For debtors and practitioners in North Carolina and the rest of the Fourth Circuit, the news is somewhat better.
The Fourth Circuit has not adopted the harsh “one-day-late” rule.
Instead, courts in this circuit generally analyze late-filed returns using the Beard framework, asking whether the filing represents an honest and reasonable attempt to comply with tax law.
The leading Fourth Circuit decision is Moroney v. United States, which held that a filing made only after the IRS had already assessed the tax liability did not qualify as a return because it did not represent a genuine attempt to comply with the tax laws.
While that case predates BAPCPA, courts in the Fourth Circuit continue to rely on its reasoning when analyzing late-filed returns.
The practical result is that late filing alone does not automatically defeat discharge.
Instead, courts generally examine questions such as:
- Was the return filed before the IRS prepared a Substitute for Return (SFR)?
- Did the filing provide the IRS with useful information to assess the tax?
- Did the debtor make a good-faith attempt to comply with tax obligations?
If those questions are answered favorably, a late return may still qualify as a return, and the tax may be dischargeable if the other timing rules (such as the three-year and two-year rules) are satisfied.
But if the debtor files only after the IRS has already completed an SFR and assessed the tax, courts in the Fourth Circuit often conclude that the filing was not a genuine attempt to comply with tax law.
Why This Split Matters
Tsai’s article emphasizes that this circuit split produces dramatically different outcomes for identical debtors.
A taxpayer who files late returns and later seeks bankruptcy relief might:
- Receive a discharge in the Eighth Circuit,
- Possibly receive one in the Fourth Circuit, but
- Face permanent nondischargeability in the First or Fifth Circuits.
That geographic disparity undermines one of the central goals of federal bankruptcy law: uniformity.
Policy Concerns Raised by the Article
The article highlights several policy problems created by the strict “one-day-late” rule.
1. It disproportionately harms vulnerable debtors
Late tax filings are frequently associated with:
- job loss
- illness
- financial instability
- lack of access to professional tax assistance.
Those are precisely the circumstances that lead many individuals into bankruptcy in the first place.
Turning a missed deadline into a lifetime nondischargeable debt does little to advance the goals of either tax administration or bankruptcy law.
2. It discourages voluntary compliance
The strict rule also produces a strange incentive.
If filing late provides no benefit in bankruptcy, a taxpayer may conclude that filing late is pointless.
That result is the opposite of what tax policy normally seeks to encourage.
3. It does little to increase tax collection
Late filing accounts for only a small portion of the federal tax gap, meaning the strict rule produces minimal additional revenue for the IRS.
Instead, it mainly generates:
- additional litigation
- inconsistent outcomes
- administrative costs.
Proposed Solutions
Tsai proposes three possible ways to resolve the circuit split.
Congressional action
The most direct fix would be for Congress to amend § 523(a)(1)(B) to:
- clarify that timeliness is not required for a filing to qualify as a return, and
- codify the Beard test.
That approach would restore the traditional understanding of late-filed returns and give real meaning to the Code’s two-year rule.
Supreme Court intervention
The Supreme Court could also resolve the split by interpreting the phrase “applicable filing requirements.”
However, the Court has repeatedly declined to address the issue despite the acknowledged circuit conflict.
IRS administrative guidance
Finally, the IRS could issue guidance clarifying that late returns remain valid returns for bankruptcy purposes.
While less definitive than legislation or a Supreme Court ruling, such guidance could reduce litigation and promote uniformity.
Commentary: A Statutory Problem Hiding in Plain Sight
For consumer bankruptcy practitioners, Tsai’s article highlights one of the lingering problems created by BAPCPA’s drafting.
The strict “one-day-late” rule is difficult to reconcile with the statute for several reasons.
First, it effectively eliminates the two-year rule for late returns. If a late return is never a “return,” the statute’s explicit reference to late returns becomes meaningless.
Second, it produces arbitrary geographic outcomes that undermine the uniformity of federal bankruptcy law.
Third, it punishes the wrong debtors—those who eventually file returns and attempt to correct their mistakes.
The Fourth Circuit’s more flexible approach—while not perfect—at least recognizes that bankruptcy law should distinguish between taxpayers who never comply and those who eventually do.
Until Congress or the Supreme Court resolves the issue, however, the dischargeability of tax debts tied to late-filed returns will remain one of the most unpredictable corners of consumer bankruptcy law—and one where geography may determine whether a debtor truly receives the fresh start the Bankruptcy Code promises.--
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