Bankruptcy & Taxes: What You Need to Know
Like it or not, tax season is upon us. In the midst of the season, it’s important for Americans to understand how bankruptcy can affect taxes and vice-versa.
Discharging Tax Debts
Those looking to discharge tax debts have a better chance of doing so if they opt for a Chapter 7 bankruptcy. Additionally, a debtor seeking discharge of tax debts must meet the following standards.
- The taxes the debtor seeks to discharge are income taxes.
- Tax fraud or evasion was not committed.
- The debt in question is three years old or more.
- The tax debt was filed within 240 days of filing for bankruptcy.
Filing Taxes After Bankruptcy
Most people living in the United States are required to file tax returns. Still, there are some key differences in the process that bankruptcy filers need to be aware of. For past bankruptcy filers, submitting tax forms on time is of the utmost importance. However, these individuals must be mindful of the potential threat posed by the accruement of new debt from taxes. Nonetheless, tax returns need to be filed in a timely manner, regardless of one’s plans for repayment. Once the forms have been filed, options for repayment may be explored.
For those who are merely contemplating bankruptcy, there are important things to consider as well. If you need to file bankruptcy during tax season, it’s best to do so before submitting your tax return. In a Chapter 7, the debtor may be required to turn over the tax refund to the trustee to pay to creditors. Additionally, those who owe money to the IRS and have yet to file should be advised to avoid paying back debts with a tax refund, as it might need to be turned over to the trustee.
The method of filing taxes also differs for those who have been faced with bankruptcy. Under Chapter 7, the process for the debtor is largely the same. However, while the debtor files his usual 1040 form, his trustee must file a 1041 for the bankruptcy estate. In the event that the debtor has filed under Chapter 11, he would need to ensure that he files both forms himself. Lastly, under Chapter 13, the process for filing the appropriate forms is the same as with Chapter 7.
For all of your bankruptcy questions, you should seek out the help of a reputable attorney. If you’re looking for a bankruptcy attorney in West Palm Beach, Kelley Fulton Kaplan & Eller should be your first call. Contact us to learn more about your options.