Discharging income taxes owed to the IRS in bankruptcy requires compliance with certain rules. One rule states that the taxes sought to be discharged is for a return that was filed at least three years before the bankruptcy filing. For instance, you owe $100,000 of income taxes to the IRS for the year 2010. You filed your tax return timely on April 15, 2011. You decide to file for Chapter 7 bankruptcy to discharge the $100,000, and your credit card debts of $60,000. Since it has been more than 3 years from April 15, 2010 to now which is April 23, 2014, you have complied with the 3-year rule to discharge taxes. Assuming you comply with the other rules, then your bankruptcy will discharge the $100,000. But, what happens if you filed your tax return LATE? Let’s say you filed your return on April 24, 2011, will your taxes be discharged? The answer is NO; they will not be discharged because it’s less than 3 years since you filed your tax return for the year 2010.

But if you lived in Massachusetts, there could be a different outcome even if you filed your tax return late. In Re Gonzales, was decided by the 1st Circuit court of appeals last month. On February 28, 2004, debtor filed his state income tax returns for tax years 1999 through 2002. On July 19, 2005, he filed his returns for tax years 2003 and 2004. All were filed LATE, but before any assessment was made by the Commissioner of Revenue. On April 19, 2010, debtor filed for Chapter 7 relief. He listed outstanding state income tax liabilities for 1999 through 2004 of $36,174. On September 23, 2010, the debtor received a discharge. In November 2011, debtor filed an adversary proceeding against the Massachusetts Department of Revenue (MDOR) asserting that his state income tax liabilities had been discharged. The MDOR ASKED FOR SUMMARY JUDGMENT ON THE BASIS THAT THE DEBTOR’S LATE FILED TAX RETURNS DID NOT QUALIFY AS “RETURNS” for purposes of Section 523(a), and that Section 523(a)(1)(B)(i) rendered non-dischargeable tax liabilities for which a return was not filed. The bankruptcy court ruled for the debtor. The 1st Circuit Court of Appeals AFFIRMED. The 1st Circuit found that the new bankruptcy law’s amendment to Section 523(a) provides an unambiguous definition of “return.” Therefore, the court said there was no need to determine whether pre new bankruptcy law rulings defining “return” were still applicable.