That doesn't necessarily have to be the tax return for the last tax year, but if it isn't the most recent return, the trustee will ask for a written explanation. The trustee will compare the income you report on your return to the amount listed in your bankruptcy paperwork. If you show that you're due a refund, the trustee will also want to check that you have the right to protect exempt it and that you've claimed the proper exemption amount. If not, you'd be required to turn the refund over to the trustee, who would, in turn, distribute it to your creditors.
Many people plan to use the return for necessary items—such as living expenses—before filing a bankruptcy case. If you choose this approach, it's a good idea to keep records of your expenditures. You must be up to date on your tax returns before you file a Chapter 13 case, but the rules allow you a little wiggle room. You'll provide copies of the returns for the previous four tax years to the Chapter 13 trustee before the meeting of creditors the hearing that all filers must attend.
If you're not required to file a return, your trustee might ask for a letter, an affidavit, or a certification explaining why. Sometimes local courts will impose additional rules for documents in their districts. If you owe the IRS a return but don't file it before your meeting of creditors , things can happen to derail your case.
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Grow Your Legal Practice. Meet the Editors. Eliminating Tax Debts in Bankruptcy. Most taxes can't be eliminated in bankruptcy, but some can. In this article, learn: when you can discharge a tax debt what happens with federal liens, and how to manage tax debt using Chapter You'll also learn the pros and cons of filing tax returns before or after bankruptcy.
Grow Your Legal Practice. Meet the Editors. Find out what happens to IRS collection of tax debts when you file for Chapter 7 or Chapter 13 bankruptcy. How Bankruptcy Stops the IRS When you file a bankruptcy case, an injunction a type of court order called the automatic stay goes into effect to stop creditors, including the IRS, from starting or continuing collection activity, like sending you letters, garnishing your wages or your bank account, or filing liens against your property.
Which Tax Debts Get Discharged? Taxes must meet the following criteria before being forgiven: The taxes are on wage-related income or gross receipts business income. The income taxes were due at least three years including valid extensions before you filed the bankruptcy. You filed your tax return at least two years before you filed the bankruptcy case. If you did not file a return, if you filed the return late, or if the IRS filed a substitute return for you, some bankruptcy courts have held that those taxes will never qualify for a discharge.
IRS tax assessment—the process of entering the tax on the books as a tax liability—occurred at least days before filing for bankruptcy. This period could be lengthened if you had pending an offer in compromise or if you filed a prior bankruptcy case.
You didn't commit fraud or willfully try to evade paying your taxes for the tax year in question. What Happens to a Nondischargeable Tax Debt? Chapter 7 bankruptcy. After Chapter 7, you may not be personally liable for an income tax debt associated with a lien, and the IRS cannot go after your bank account or wages, but if the IRS has already recorded a lien on your property, you must pay the lien using proceeds from the sale of the property.
Bankruptcy does not provide solutions for all types of tax debt. Recent property taxes, trust fund taxes, sales taxes, certain employment taxes, and non-punitive tax penalties from less than three years before filing are non-dischargeable. For example, if you are a small business owner, you cannot get a discharge for the sales taxes that your customers paid that you were required to send to the government.
In a Chapter 13 bankruptcy case, you will have to repay taxes, but how much you repay depends on the classification of the tax debt as either a priority claim or a non-priority unsecured claim. Priority tax debts include recent property taxes, taxes that you are required to collect or withhold such as from FICA or Medicare , employment taxes, excise taxes, and non-punitive tax penalties. Priority tax debts must be paid in full, but most bankruptcy filers only pay a portion of non-priority unsecured claims, which may include some tax debts.
Once the bankruptcy court approves your debt payment plan, the IRS cannot object to your payment plan. Non-priority unsecured claims must be paid only after priority and secured claims are fully paid.
In most cases, you only pay a percentage of the unsecured debt, and this percentage is calculated by looking at the value of your nonexempt assets. A tax debt is non-priority and unsecured if it is income tax that meets the five conditions described above. However, in order to obtain a discharge of the non-priority unsecured debts at the end of your Chapter 13 plan, you must file all your required tax returns for the tax periods within four years of your filing, and you must continue to file all required returns and pay taxes as they come due during the years that your Chapter 13 bankruptcy is underway.
If you fail to file returns or pay current taxes, your Chapter 13 case may be dismissed. Chapter 7 is not the only way to handle bankruptcy and taxes with the IRS, so you should consider other chapters before filing. Yes, state taxes are dischargeable in Chapter 7 bankruptcy, in certain circumstances. Generally speaking, state income tax discharge factors line-up with those used by the federal government. So, if you are able to discharge your federal income taxes with a Chapter 7 bankruptcy, you should be able to discharge state income taxes.
However, since these circumstances can vary state-by-state, especially when it comes to business taxes, you should speak with one of our tax professionals before moving forward to get the most up-to-date information. If you cannot discharge your state income taxes with a Chapter 7 bankruptcy, a Chapter 13 bankruptcy may be more helpful.
If the IRS did not file a lien before the bankruptcy petition was filed, the tax lien will generally be removed as a result of the bankruptcy.
Since Chapter 7 and Chapter 13 are the most common types of bankruptcy filings that affect individuals, it is important to understand what tax ramifications filing for bankruptcy will have on all of your liabilities, including your tax debts before you make the ultimate decision to file.
Chapter 11 is available to any business or individual, even though it is primarily used by corporations. Unlike chapter 7, Chapter 11 will not completely absolve you of all of your IRS tax debts. This should be considered more of a reorganization plan where some debts will be repaid and others will be forgiven.
The individual or business will have its entities reviewed by a bankruptcy trustee who will balance the competing interest of creditors and the IRS. This particular chapter only applies to fisherman and farmers who get behind on their taxes. These businesses are treated differently because they are usually the first to be affected by an economic downturn or natural disasters. Historically, farms and fisheries were smaller businesses who needed to be protected so that food production remained the stable during a crisis like the Dust Bowl.
The requirements and process are almost identical to a Chapter 13 filing but with further leniencies and special conditions. Chapter 13 is also called a wage earners plan.
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