If you have filed for bankruptcy in the past year, or are considering it in the future, it is important to understand how that decision effects preparing your taxes. As long as you understand how to file, you should have no problem filing your tax returns.
According to the Bankruptcy Code, you should file an income tax return for the current tax year or request an extension from the IRS. If this isn’t done in a timely fashion, your bankruptcy case could be converted or dismissed.
When you file for Chapter 7 or Chapter 13 bankruptcy, you appoint a trustee to handle your financial affairs. The IRS Publication 908, Bankruptcy Tax Guide states the responsibility of your bankruptcy trustee include filing taxes on the bankruptcy estate. This means that in addition to you filing your income tax form for the current tax year, your bankruptcy trustee will file Form 1041, U.S. Income Tax Return for Estates and Trusts. They also will need to pay any necessary taxes out of the bankruptcy estate.
In addition to the above information, below are five tips for bankruptcy filers from TurboTax:
- Have an attorney assist you throughout your bankruptcy case, as well as through the tax filing process. Let them know whether you have filed a return for each of the past three years.
- If you have not filed this year’s taxes, do so before filing for bankruptcy unless you know you will receive a substantial refund.
- If you have filed your income taxes already, make sure your attorney has all of your tax records and knows how you used any refund money. The trustees will always ask.
- If you get a refund and are considering bankruptcy, do not pay bills with the tax money. Doing so will slow the processing of your bankruptcy case.
- File your taxes on time each year. The IRS gives penalties for both failure to file and failure to pay and even if you do not file, they will find out if you owe them money.