A recent court case (United States v. Schmidt, 2016 WL 7230503 (E.D. Wash. 12/14/16).) {Consumer Bankruptcy News., 1/16/17 Vol27; Issue 7; Reuters, 2017)} shows the importance of filing tax returns. A couple in Washington State believed that 1099 income was not taxable even though they had W-2 and 1099. They filed the tax return and explained why they did not believe they owed taxes on this income. Their 1998 tax return was filed in 2000 and the bankruptcy petition was filed in 2014, seeking discharge of these taxes. The government challenged the bankruptcy filing based on a fraudulent return theory. The Bankruptcy Court ruled that there was no fraud involved in this case. Federal Bankruptcy Judge Thomas O Rice stated that there was no fraud because all income was disclosed, the return was filed and a good faith memo was included explaining why they did not believe they owed taxes.
The important thing to learn from this case is to remember that when you owe taxes, to always timely file the tax returns because it protects your rights:
- If you cannot pay and later need to file for bankruptcy, only a filed return can be discharged. (Chapter 7)
- Also, the government generally has 10 years to collect the debt if a return is filed, “Statue of Limitations,” although there are exceptions which extend this period such as tax court, Collection Due Process Hearings, and Offer in Compromise (OIC).
You should always file your taxes. It may help you down the road.