Discharging income tax debt just got more difficult. In Mallo v. IRS, the Tenth Circuit recently ruled that tax debts from late returns can’t be discharged through bankruptcy, making wiping out tax debt an even harder task.

Tax Bankruptcy Basics

To put the court decision in context, it’s helpful to understand the fundamentals of tax bankruptcy. Discharging tax debt is one of the trickier areas of consumer bankruptcy law. As the agency itself has recently admitted, the IRS doesn’t always have the resources to quickly pursue its debtors. Because of this, the IRS does have more aggressive collection remedies compared to other creditors. Discharging tax debt is difficult but it can be done for certain tax liabilities. There are a few conditions, known as the Beard test, which the taxpayer must meet before they can wipe out tax debts:

  • The tax debt is comprised of income taxes (as opposed to payroll taxes or other penalties).
  • The tax liability is old enough. The tax return must have been due three years before the taxpayer filed for bankruptcy and the IRS must have assessed the tax debt at least 240 days before bankruptcy was filed.
  • No attempted fraud or tax evasion took place.
  • And, finally, the taxpayer filed a tax return for the debt at least two years before he or she filed for bankruptcy. It doesn’t count if the IRS filed a return on the taxpayer’s behalf.

Are Late Returns Eligible for Discharge?

The fourth requirement of filing the tax return was under scrutiny in this case. The question at hand: do tax returns filed late, but filed at least two years before bankruptcy, fulfill the requirement?

In the case of the Mallos in the Tenth Circuit, the answer was no. The couple filed a joint tax return in 2007 and filed for bankruptcy in 2010. However, the IRS had originally assessed the tax debt after the couple failed to file returns in 2000 and 2001. That debt, the court decided, was ineligible for discharge. The court decided that the Mallos’ 2007 tax return wasn’t “a reasonable attempt to fulfill the tax law requirements” because the IRS had already assessed additional taxes.

The Tenth Circuit decision departed from the Colorado district court’s opinion, which allowed the late tax return.

With similar pending cases in the First and Ninth circuits, the issue could ultimately go to the Supreme Court. Unless the IRS amends its conditions for tax debt relief, the Supreme Court could rule that late returns simply aren’t eligible for tax liability discharge.


The issue has a widespread impact for many struggling consumers. Most individuals filing for bankruptcy will have some sort of tax debt. After all, if you’re trying to keep your home and your assets, the tax bill is what often gets put on the back burner.

Tax advocates are concerned this will unnecessarily penalize these taxpayers and deprive them from the benefits of bankruptcy. The implication is that all late filers, including those who only file a day late or fail to obtain the proper extensions, would no longer have recourse for tax debt discharge.