Failing to file a tax return can prevent the consumer from being able to discharge the debt if they ever seek bankruptcy relief. As a general rule, taxes that are due 3 years or less from the date the bankruptcy petition is filed are not dischargeable and will still be owed once the individual receives the discharge. But the return has to have been filed at least 2 years before the bankruptcy case is filed. The return can even be filed late as long as the 2 years have passed. And that’s a good reason to file tax returns as soon as possible. If it’s ever necessary to file bankruptcy, it will be very helpful if those returns were filed at least 2 years ago.
However, if an individual doesn’t file a tax return when it is due and the IRS sees income on a W-2 or 1099, the IRS can estimate the amount of tax they think is owed by preparing a Substitute For Return. Once the IRS estimates the tax they think you owe on their Substitute For Return, they will send a deficiency notice.
The consumer can then file the real return and will probably owe considerably less than estimated. But, for bankruptcy purposes, the IRS Substitute For Return does not qualify as a return for that 2-year rule. Even worse, some bankruptcy courts have held that any return filed by a taxpayer after the IRS has prepared a Substitute For Return does not qualify as a return for bankruptcy purposes. That means that once the IRS prepares a Substitute For Return for a specific year, it will never be discharged in bankruptcy court. For these reasons ,it is important to file tax returns even if the consumer owes and cannot pay it.