Filing your taxes and filing for bankruptcy are two things that can be confusing and challenging on their own. When you put the two together, it can cause debtors even more stress. However, understanding the basics and what to look out for can make the whole situation a lot easier.
Filing your taxes after filing for bankruptcy is not as complicated as it may seem, and if you are still confused after doing some research, you can always reach out to a bankruptcy lawyer. Bankruptcy lawyers are important to work with when you file for bankruptcy, but they can be helpful and offer guidance even after you’ve filed.
If you have concerns about how your taxes should be handled after filing for bankruptcy, don’t hesitate to reach out to an attorney for help. While the internet offers a lot of helpful information on how to file your taxes after filing for bankruptcy, if you make any mistakes, it could negatively impact your tax return and your bankruptcy case. Your taxes will be handled differently depending on what type of bankruptcy you file, such as Chapter 7 or Chapter 13, and it can be easy to mix things up if you aren’t careful. When in doubt, always ask for help.
If you have unpaid tax debt prior to filing for bankruptcy, you will likely receive several letters from the IRS, which can feel threatening. However, once you file, an automatic stay will go into effect, which will put a pause on IRS collection efforts. After you file, it is possible that your tax debt will get discharged, but it depends on your individual circumstances and which type of bankruptcy you file.
In a Chapter 7 bankruptcy case, for example, you can only get income tax debt discharged. Additionally, to qualify for a discharge, you must have filed your tax returns at least two years prior to filing, the income tax debt must be at least three years old, and the tax debt must have been assessed by the IRS 240 or more days before you file for bankruptcy. In addition, if you filed the return and an audit caused the assessment of the tax, the IRS may consider that tax debt not dischargeable. There are other factors that may lead to a tax debt no being discharged. Speak with your attorney to assess your particular situation.
If you have already filed for bankruptcy and then you accrue new tax debt, it can negatively impact your case. A provision of bankruptcy is that debtors may not acquire any new delinquent balances while under the court’s supervision. So if you acquire new tax debt that you cannot pay after filing for bankruptcy, it could result in your case getting dismissed. If you filed a Chapter 11 or Chapter 13, your case could be dismissed or converted to a Chapter 7.
Another thing to take into consideration when filing your taxes while dealing with a bankruptcy is your tax refund. If you expect to get a sizeable tax refund, you may want to delay filing your bankruptcy. Your refund is money that is owed to you, but if you file for bankruptcy before you receive and reasonably spend your refund, you may have to turn it over to your trustee, who will then use it to pay something to your creditors. You should consult with an attorney before filing your taxes if you plan to file bankruptcy soon after.
Once you have filed your bankruptcy, you will want to make sure you file the right forms come tax season. Bankruptcy Code requires debtors to file an individual tax return; if they do not do this, or do not request an extension, their bankruptcy case could get dismissed or converted. In most cases, the procedure to file taxes after bankruptcy is the same as before filing.
Another thing to consider is that you could receive a 1099-C Cancelation of Debt from a creditor after receiving a discharge. Discharged or forgiven debt can be a taxable event. However, debts discharged in bankruptcy do not count toward income. It does, however, necessitate that you file an IRS form 982 with your taxes to alert the IRS to the discharge of the debt in bankruptcy. Please be sure to discuss the 1099s that you receive with your attorney and/or tax advisor.
Filing Taxes After Chapter 7
When you file Chapter 7 bankruptcy, you as the debtor are required to file a 1040 tax return per usual. Your trustee will then need to file a Form 1041 for the bankruptcy estate in some cases.
Filing Taxes After Chapter 11
If you filed a Chapter 11 bankruptcy, you will likely have been in control of your assets and thus acted as the trustee yourself. This means that you will be responsible for filing both Form 1040 and 1041 come tax season.
Filing Taxes After Chapter 13
Chapter 13 bankruptcies are a little different in that the debtor pays into a monthly plan for a period of time to pay back their creditors. However, you will still have been assigned a trustee, and as with a Chapter 7, your trustee will be responsible for filing Form 1041, while you will be responsible for Form 1040.
At Sawin & Shea, we provide compassionate and understanding representation to all our clients. Filing your taxes before or after filing for bankruptcy can be confusing, but it doesn’t have to be stressful. Our team can offer you guidance and support to ensure the best possible outcome for your tax situation and your bankruptcy case.