You know what they say: Two things in life are certain – death and taxes. And that’s still true even if you have filed for bankruptcy. However, a few things may change regarding how you file your taxes this year.
Now that you have filed for bankruptcy, you have temporarily given up the right to handle your own financial affairs. The court has appointed a trustee to do this for you. Your finances are now part of an estate, and it is the trustee’s responsibility to pay all of your debts that have not been exempted by the court. This includes the taxes for the estate in bankruptcy.
This can be confusing because you are now required to file two kinds of tax forms – one for yourself as an individual and a one for your estate. According to the IRS, the Bankruptcy Code requires a debtor to file an individual tax return, or request an extension. If this does not happen, the bankruptcy case can be converted or dismissed. In addition, the bankruptcy trustee is required to file an estate tax return, Form 1041, for the bankruptcy estate.
If you filed Chapter 7, then as an individual, you would go ahead and file your 1040 as in previous years. Your court-appointed trustee is not obligated to handle this because it is not considered a debt. Your trustee will, however, file taxes for the estate that is in bankruptcy.
If you filed Chapter 11, then you remain the trustee of your estate. You are expected to file a 1040 tax return as an individual and a 1041 tax return for the bankruptcy estate. This step is often overlooked since most Chapter 11 filings are by corporations, not individuals. Still, it is important for Chapter 11 debtors to be conscious of filing two forms. Any return you receive from your individual 1040 is subject to paying off the bankruptcy estate debt.
Will I Still Get a Tax Refund?
If you filed – or are thinking about filing – for Chapter 7 bankruptcy, this question is an important one without a simple answer. The answer will vary depending on multiple issues:
- When your bankruptcy case occurs
- When you receive your tax return
- Whether you can get a court exemption for your return
To decide if you will get to keep your return, you will need to calculate whether the income you are filing for was earned before you filed bankruptcy or after. If you are getting an individual tax return from income you earned AFTER you filed, then the money is yours to keep. If, however, your return is from income you earned BEFORE you filed, will go directly to paying off your estate debt, regardly of when you receive the return.
Past Due Taxes
Simply put, most tax debts will not be forgiven in bankruptcy.
According to NOLO, the only possible exceptions are if:
- The taxes are income taxes
- You did not commit fraud or willful evasion
- The debt is at least three years old
- You filed a tax return
- You pass the “240-day rule”
If you meet these criteria, it is possible to get past due taxes dismissed. Otherwise, you are liable for them.
Notice of Tax Deficiency
If you are delinquent on your taxes, you may receive a notice from the IRS. A Notice of Deficiency, aka a 90-Day Letter, notifies you of owed income taxes, along with interest and penalties. Communication is key. Make sure these delinquent taxes have been disclosed to your trustee, or that you speak with an IRS agent about a repayment schedule or an offer in compromise.
Bankruptcy will not protect you from an IRS audi, but it can protect you – at least in part – from the results of such an audit. The automatic stay in bankruptcy protects you against your creditors, to include the Internal Revenue Service. While you may still be audited after filing, any taxes, interests, or penalties may be reduced or eliminated.
One of the biggest mistakes people make after bankruptcy is filing their tax returns in the same manner they have in previous years. This is not the procedure that should be followed, and hopefully this article helps you understand there are different ways to file taxes post-bankruptcy.