Last week, the U.S. Court of Appeals for the 10th Circuit held that a debtor could not discharge a tax liability if the underlying return was filed late. Section 523 of the Bankruptcy Code states that certain debts continue to exist after a bankruptcy. These debts include any tax liability arising from a return that was not timely filed (including any lawful extension of the filing date). This case highlights the importance of filing timely and accurate returns, even if you can't pay the taxes due.
Similar problems arise in the criminal tax context. Failure to file a return is a crime. In contrast, it is lawful to file an accurate return but not pay the amount due because you can't afford to pay. In that case, you may be hit with monetary penalties, but you won't go to federal prison.
To paraphrase Alfred Lord Tennyson, "Tis better to have filed and not paid than never to have filed at all."