For years, the tax-in-bankruptcy rules looked simple enough to fit on an index card: three years since the return was due, two years since it was filed, 240 days since assessment, no fraud. Then, in 2005, Congress added a definition of "return," and some courts read it to wipe out the two-year rule for nearly everyone who ever filed late. In re Fahey is the leading case for that reading. Where you live determines whether it applies to you.
The Facts
The First Circuit decided four consolidated appeals involving John Brown, Brian Fahey, Anthony Gonzalez and Timothy Perkins. Each failed to timely file Massachusetts income tax returns for multiple years, and each failed to pay. Eventually each filed the late returns but still did not pay all the taxes, interest and penalties. More than two years later, each filed for Chapter 7 bankruptcy and sought to discharge the state taxes.
The Massachusetts Department of Revenue argued the taxes fit within the exception to discharge for taxes for which a return "was not filed." The lower courts split, with most siding with the debtors.
The Issue
Is a Massachusetts income tax return filed after the due date a "return" under 11 U.S.C. § 523(a), so that the tax shown on it can be discharged in bankruptcy?
The Holding
No. Judge Kayatta wrote for the majority: "we conclude that it does not." Judge Thompson dissented.
The Reasoning
The statute
Section 523(a)(1)(B) excepts from discharge a tax for which a required return "(i) was not filed or given; or (ii) was filed or given after the date on which such return ... was last due ... and after two years before the date of the filing of the petition." Read alone, that suggests a late return filed more than two years before bankruptcy is fine.
The 2005 hanging paragraph
In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act added an unnumbered paragraph at the end of § 523(a): "For purposes of this subsection, the term 'return' means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements)." It adds that the term includes a return prepared under IRC § 6020(a) or a similar state or local law, or a written stipulation to a judgment or final order, but does not include a return made under IRC § 6020(b).
A deadline is a filing requirement
Massachusetts law says income tax returns "shall be made on or before" a specific date. The court asked whether timely filing is a "filing requirement." "The answer is plainly yes." A return filed late therefore does not satisfy applicable filing requirements and is not a "return." The court noted that the Tenth Circuit in Mallo (federal returns) and the Fifth Circuit in McCoy (Mississippi returns) had reached the same conclusion.
The two-year rule still has some work
The debtors argued this reading made the two-year rule in § 523(a)(1)(B)(ii) meaningless. The court disagreed because the hanging paragraph itself treats a § 6020(a) return, which the IRS prepares with the taxpayer's help when a return was not filed, as a "return" even though it is late. The court accepted that such returns are rare but held the safe harbor still gives the two-year rule a role.
The safe harbor is narrow
The court acknowledged the IRS Chief Counsel's 2010 position that § 6020(a) returns are a "minute" number and that the safe harbor was "illusory" because taxpayers cannot demand one. The court accepted that such returns are rare and are allowed only at the IRS's behest, but pointed to a Texas bankruptcy case in which a debtor whose return was prepared under § 6020(a) obtained a discharge. In the court's view, the safe harbor was narrow, not imaginary.
Fresh start arguments did not change the text
The debtors invoked the principles that discharge exceptions are narrowly construed and that bankruptcy offers a fresh start, and called the result "draconian." The court found little need for secondary canons when the question was simply whether a filing deadline is a filing requirement.
The Other Side: In re Shek
The Eleventh Circuit disagreed in In re Shek, 947 F.3d 770 (11th Cir. 2020), a case from the Middle District of Florida. John Shek filed his 2008 Massachusetts return seven months late, owed $11,489, and filed Chapter 7 six years later. The Eleventh Circuit held his tax debt was discharged.
The court acknowledged that "[a]ll three of our sister circuits to have considered this question" had adopted the "one-day-late rule." It concluded, however, that "applicable filing requirements" does not unambiguously include deadlines, and that reading it to do so would render the two-year rule in § 523(a)(1)(B)(ii) "insignificant," operating only on a "minute" number of § 6020(a) returns. It also relied on the principle that exceptions to discharge should be confined to those plainly expressed. "We conclude that § 523 does not incorporate a mandatory precondition that a tax return must be timely filed to be dischargeable." The court noted that timing still matters under the traditional test courts use to decide whether a document is an honest and reasonable attempt to file a return.
What It Means for Taxpayers Today
Your circuit decides the rule
If your bankruptcy is in the First, Fifth or Tenth Circuit, assume a late-filed return can make the related tax nondischargeable, no matter how long you wait. If you are in Florida, Georgia or Alabama, Shek rejects the one-day-late rule, and a late return filed more than two years before the petition can still support a discharge if the other requirements are met. Other circuits may follow different approaches. Get advice for your jurisdiction before you file.
Substitute returns do not count
Every court agrees on one thing because the statute says it: a return the IRS prepares on its own under IRC § 6020(b), the substitute for return the IRS creates when you do not file, is not a "return" for discharge purposes. If the IRS assessed your tax through a substitute for return and you never filed your own, that tax generally will not be discharged. Our article on unfiled tax returns explains substitutes for returns.
File now, even late
Whatever circuit you are in, filing a late return is better than never filing. Unfiled years are never dischargeable. In the Eleventh Circuit, a late return also starts the two-year clock. Pair this with the three-year and 240-day rules discussed in Young v. United States, and with the willful evasion exception in In re Griffith.
State taxes follow state filing rules
Fahey and Shek involved Massachusetts returns. The hanging paragraph points to "applicable nonbankruptcy law," so the answer for state taxes can turn on that state's own filing rules and how it defines a return. In Shek, the court found Massachusetts law itself still treats late returns as returns.
The Bottom Line
Fahey stands for a harsh reading of a short paragraph: in its view, a return filed one day late is no return at all for bankruptcy purposes. The Eleventh Circuit, which covers Florida, refused to go along. Until the Supreme Court or Congress resolves the split, the answer to "can I discharge this tax?" may depend on which side of a circuit line you live on.