Better Late Than Never

In a posting on January 24, I discussed the Izzo case. There, a taxpayer had his income computed by the IRS, but subsequently filed returns were accepted by the Service as amended returns. These amended returns showed substantially lower amounts of tax due for the years in question. More importantly, however, the taxpayer was allowed to discharge his entire tax liability for the years in question in a bankruptcy proceeding.

The Bankruptcy Court for the Southern District of Florida recently issued an opinion that serves to underline the importance of filing a return, even where the conclusion as to the computation of the tax due is the same as reached by the IRS in their computation.

In this case, In Re Klein, the taxpayer initially failed to file returns. As was the case in Izzo, the IRS computed the tax due for the years in question. Subsequently, the IRS initiated an broad amnesty program. At about that time, Klein apparently "got religion" and filed returns for the years in question, as well as for subsequent years. In all years after that, he remained in compliance with his filing obligations. The opinion quotes from Klein's deposition as follows: "I remember them saying, if you hadn't filed your taxes, come clean, come clean. This is when I started living, [19]95. I cleaned up my life. I got married, I quit all of my bad habits. Filed my tax returns . . . I said, great, I can file the returns and get on with my life."

Accepting Klein's testimony in conjunction with the uncontested facts surrounding his subsequent tax compliance, the Court concluded that the returns for the years in question represented a good faith effort on Klein's part to fulfill his tax obligations. Therefore, it concluded that the taxes due with respect to the years in question could be discharged in bankruptcy.

I note that there is a difference of opinion among the various courts that have considered this issue as to whether the returns filed in these sorts of cases constitute returns for the purposes of the bankruptcy discharge provisions. The opinion in Klein discusses those cases at some length and is worthy of review.

The opinion is apparently not available on the web except through proprietary websites. Anyone who wants a copy of the opinion can send me an e-mail and I will forward a copy.