When Is a Tax Return Not a Tax Return? Ninth Circuit’s Strict Stance on IRS Debt in Bankruptcy

Californians: A return filed after an SFR does not reset the bankruptcy discharge clock.

As I mentioned in my prior article here, one key factor in determining whether IRS tax debt is dischargeable in bankruptcy is the “3-2-240 rule,” which includes the requirement that the tax return for the debt in question must have been filed at least two years before the bankruptcy petition.  But what qualifies as a “return” under bankruptcy law?

To determine whether a document is a “return” for purposes of discharging assessed tax debt in bankruptcy, courts apply the Beard test, which requires that a tax document: (1) purport to be a return, (2) be signed under penalty of perjury, (3) provide enough information to determine tax liability, and (4) reflect an honest and reasonable attempt to comply with tax laws.  A major issue arises when a taxpayer files a return after the IRS has prepared a Substitute for Return (SFR), and there is circuit conflict as to how to interpret the Beard test in the first place.  Some circuits take a strict “one-day-late” approach, making any return filed after an SFR non-dischargeable.  Others apply a more lenient test.

In Salvador v. United States (2024), the Ninth Circuit, which governs California, reaffirmed its stricter stance (though not the strictest).  It ruled that a return filed after the IRS assesses liability via an SFR does not meet the Beard test, making the tax debt non-dischargeable in bankruptcy.  The U.S. Supreme Court declined to review the case, leaving this ruling as controlling law in California.

The Ninth Circuit’s decision is particularly firm, even criticizing the taxpayer for appealing, noting that its precedent does not follow the Beard test or other circuits' rulings.  With the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) reinforcing that a return must meet “applicable nonbankruptcy law,” legislative action may be needed to resolve these inconsistencies.

For Californians, this decision underscores the importance of filing tax returns on time—at least two years before filing for bankruptcy and certainly before the IRS initiates the SFR process.  If the IRS files an SFR on your behalf and you later submit a return, your tax debt is unlikely to be discharged in California.  Filing a tax return after the IRS has already made an SFR assessment is not “an honest and reasonable attempt” to comply with the tax laws (according to the Ninth Circuit). 

There is perhaps one rare exception: In re Golden (2012), a case where a California bankruptcy court allowed discharge of tax debt from a late-filed return after an SFR.  However, this case is an outlier and not reliable precedent.

If you’re facing IRS tax debt issues, consulting an experienced bankruptcy and tax attorney is essential to exploring your options and preventing your tax debt from growing even more.