Making sure your tax returns are current is a smart idea if you’re considering filing for bankruptcy.
Waiting to file your income tax return until after you file for bankruptcy won’t give you any meaningful advantages. You should be current when filing your Chapter 7 or Chapter 13 matter, nevertheless, for a variety of reasons.
Bankruptcy under Chapter 7 and Tax Returns
The trustee in charge of your case will request your most recent tax return when you apply for Chapter 7 bankruptcy. The trustee will need an explanation if that isn’t the most recent return, even if it doesn’t have to be for the most recent tax year.
The trustee will contrast the amount stated in your bankruptcy petition with the income you show on your tax return. The trustee will also want to make sure you have the right to protect (exempt) the refund if you can demonstrate that you are entitled to one and that you have claimed the correct exemption amount. If not, you would have to give the trustee your refund so they could give it to your creditors.
Before filing for the case, many people arrange their bankruptcy so they can use the return for essentials like living expenses. It’s a good idea to maintain track of your expenses if you adopt this strategy.
Bankruptcy under Chapter 13 and tax returns
Before filing a Chapter 13 case, you generally need to have all of your tax returns current, but there are several exceptions to the requirements. Before the 341 meeting of creditors (the hearing that all filers are required to attend), you must give copies of your returns for the four tax years prior to that to the Chapter 13 trustee.
Your trustee may request a letter, an affidavit, or a certification explaining why you are exempt from filing a return if you are. There are situations when district-specific local courts set additional guidelines for papers.
Things could go wrong in your case if you owe the IRS a return but fail to pay it in a timely manner (before to your 341 meeting of creditors).
a movement. You will have only a very short time to submit your returns when the trustee files a motion. If the time passes without being met, the court may automatically dismiss your case, denying you the opportunity to present your case before the judge.
a replacement return. Based on your prior income, the IRS may be required to submit a claim with its best guess as to how much you owe. The issue? IRS projections are typically larger than the amount you would ultimately owe after filing a correct return.
Utilizing Chapter 13 Bankruptcy to Manage Taxes
Once you recognize that filing for Chapter 13 bankruptcy to handle your tax obligation can be a wise choice, filing your tax return might not be as difficult. This is why:
Depending on how much disposable income you have left over after deducting your reasonable and necessary costs from your salary, dischargeable taxes (usually those older than three tax years) may be forgiven without any payment at all.
While you are in Chapter 13 bankruptcy, you won’t be subject to any further interest or penalties on past-due dischargeable taxes (you will, however, be required to pay interest on non-dischargeable taxes).
The Chapter 13 plan can be used to discharge an IRS tax lien.
As long as you include all owed income taxes, file your tax returns on time, and maintain your post-petition tax responsibilities current throughout your Chapter 13 plan, the IRS must abide by the plan.
Keep in mind that any non-dischargeable taxes (usually those incurred during the last three tax years) that cannot be discharged in bankruptcy must be paid in full throughout the three to five-year Chapter 13 plan. You will have paid off the majority or all of your other debts by the time it is finished, along with your taxes.