Filed Your Tax Return Late? When Those Taxes Can Still Be Discharged in Kentucky
Often, yes. In Kentucky, a tax return filed late can still count for bankruptcy purposes, as long as you filed it before the IRS made its own return for you and assessed the tax. That is the rule from the Sixth Circuit, the federal appeals court that covers Kentucky. Other parts of the country are much stricter.
Where you live changes the answer here. That makes this one of the most important tax questions a Kentucky filer can ask.
The Rules Every Tax Discharge Starts With
Income taxes can be wiped out in bankruptcy, but only if they are old enough and meet a few rules. The short version:
- The return was due more than three years before you file bankruptcy.
- You filed the return more than two years before you file bankruptcy.
- The tax was assessed more than 240 days before you file.
- There was no fraud or willful attempt to evade the tax.
Our tax discharge determinator guide walks through how to count those dates. This article focuses on one piece: what counts as “filing a return” when you filed late.
Why a Late Return Can Be a Problem
The two-year rule only starts when you file a real return. Some courts say a late return is not a real return at all. If a court says that, the tax can never be discharged, no matter how long you wait.
That split comes from a sentence Congress added to the Bankruptcy Code in 2005. It says a return must meet “applicable filing requirements.” Courts disagree about whether that includes the due date.
- The strict view. The First, Fifth, and Tenth Circuits have said a return filed even one day late does not count. This is often called the “one-day-late rule.”
- The Kentucky view. The Sixth Circuit has not adopted the one-day-late rule. Courts here apply an older test from In re Hindenlang, 164 F.3d 1029 (6th Cir. 1999).
What Hindenlang Means for You
In Hindenlang, the taxpayer did not file returns for several years. The IRS prepared substitute returns, sent a notice of deficiency, and assessed the tax. Only then did the taxpayer file his own returns. He waited two more years and filed bankruptcy.
The Sixth Circuit said those late returns did not count. By the time he filed them, the IRS had already assessed the tax. His returns served no purpose under the tax law.
The flip side is what makes this useful. In the same case, he also filed late returns for other years before any assessment. The IRS did not challenge the discharge of those years.
So in Kentucky, the key question is timing:
- Late return, filed before the IRS assessed the tax: It can count as a return. The two-year clock starts when you filed it.
- Late return, filed after the IRS made a substitute return and assessed the tax: It likely does not count. That tax will usually survive the bankruptcy.
What Is a Substitute for Return?
If you do not file, the IRS can file a return for you. This is called a substitute for return, or SFR. The IRS uses the income it knows about and gives you few or no deductions. The tax is often higher than what you would have owed.
There is one exception worth knowing. A return the IRS prepares with your help and that you sign can count as your return. A substitute return prepared without you does not.
How to Find Out Which Side You Are On
You cannot answer this from memory. You need your IRS account transcript. It shows when the IRS received your return, whether it prepared a substitute return, and when it assessed the tax.
Transcripts are written in codes. Our guide to IRS transcript codes explains what the common ones mean.
Once you have the dates, compare them:
- Did your return reach the IRS before any assessment for that year?
- Has it been more than two years since the IRS received it?
- Do the three-year and 240-day rules also line up?
The same federal rules apply to Kentucky state income taxes owed to the Kentucky Department of Revenue.
If Some Years Do Not Qualify
Not every year has to qualify for bankruptcy to help. Chapter 13 can stop IRS collection and spread tax payments over three to five years. Years that do qualify can be discharged at the same time. Our page on income taxes and bankruptcy covers the broader options.
Nick Thompson is a former West Virginia state tax department attorney and holds U.S. Tax Court License #51. Tax timing is a core part of his practice.
Frequently Asked Questions
In Kentucky, often yes. A late return filed before the IRS assessed the tax can count. You still need to meet the two-year, three-year, and 240-day rules. A return filed after an IRS substitute return and assessment usually does not count.
Some federal appeals courts say any return filed after the due date is not a return for bankruptcy purposes. Under that rule, late-filed taxes can never be discharged. The Sixth Circuit, which covers Kentucky, has not adopted it.
Usually, yes, for tax compliance reasons. But filing after an assessment may not help you discharge that year in bankruptcy. Talk to a tax and bankruptcy lawyer before you file, so you understand what each year can and cannot do.
Yes. Nick Thompson serves Jefferson, Oldham, Bullitt, Spencer, Nelson, and Meade counties. He reviews IRS transcripts and tax timing personally at a free consultation. Call 502-625-0905.
Check the Dates Before You Assume the Worst
Many people assume late taxes are stuck with them forever. In Kentucky, that is often not true. Nick Thompson has practiced law in Kentucky since 1991 and has handled tax matters since his time as a state tax department attorney in West Virginia.
Call 502-625-0905 for a free consultation. Bring your IRS account transcripts for each year you owe, and we will check the dates together.
