Michael Goldstein breaks down a bankruptcy rule that can trap Massachusetts tax debt

Attorney Michael Goldstein has published a guide on a First Circuit bankruptcy rule that can permanently bar discharge of some Massachusetts income tax debt tied to late-filed returns. The analysis matters because the timing of a tax filing can determine whether old debt can ever be wiped out in bankruptcy.

Why it matters: - Massachusetts filers facing old income tax debt may still be stuck with it in bankruptcy if the underlying return was filed late. - The First Circuit rule can make the filing date as important as the age of the debt itself. - The guide is aimed at people planning year-end finances and evaluating whether bankruptcy could help with tax liabilities.

What happened: - Attorney Michael Goldstein, of counsel to Phillips Law Offices, published a guide on discharge of Massachusetts tax debt in bankruptcy. - The guide focuses on a First Circuit standard that can permanently block discharge of certain Massachusetts income tax debt tied to a late-filed return. - Goldstein said Massachusetts residents often assume old tax debt will be wiped out in bankruptcy, but the Fahey decision can keep discharge off the table when a return is filed late. - The published analysis is available at the full guide.

The details: - Federal tax debt generally must satisfy three timing tests before a bankruptcy court will discharge it. - The return’s due date, including extensions, must be more than three years before the bankruptcy filing date. - The return must have been filed at least two years before the bankruptcy filing date. - The tax must have been assessed at least 240 days before filing, or not yet assessed. - All three tests come from Bankruptcy Code provisions that incorporate federal tax law by reference. - In Fahey v. Massachusetts Department of Revenue, 779 F.3d 1 (1st Cir. 2015), the First Circuit held that a Massachusetts state income tax return filed even one day late does not count as a “return” for bankruptcy purposes. - Under Fahey, the two-year filing clock never starts, so the tax tied to that return is permanently excepted from discharge. - The First Circuit later declined to revisit that ruling. - The Eleventh Circuit uses a more flexible standard that considers the full circumstances of a late filing. - The Supreme Court has declined to resolve the split between the circuits. - The guide says late-filing and late-payment penalties run on an independent three-year clock and are often dischargeable even when the tax itself is not. - A Chapter 7 discharge removes personal liability for a dischargeable tax debt but does not erase a Massachusetts Department of Revenue lien already recorded against property. - The lien remains because it is a separate claim against the property, not against the individual. - Goldstein’s guidance is general and depends on the filer’s specific tax years, filing history and assessment dates.

Between the lines: - The First Circuit rule gives late-filed returns a far harsher result than many debtors expect. - That makes bankruptcy tax planning highly fact-specific in Massachusetts, especially for people with older returns that were filed after the deadline. - The circuit split leaves different outcomes depending on where a filer lives, which adds uncertainty for taxpayers and practitioners.

What’s next: - Massachusetts filers evaluating bankruptcy relief will need to review filing dates, assessment dates and whether any returns were late. - People with state tax liens will need separate analysis even if some personal tax liability can be discharged. - The published guide is intended to help readers compare the First Circuit rule with approaches used in other circuits.

The bottom line: - In Massachusetts, a tax debt can be old and still survive bankruptcy if the return behind it was filed even one day late.