It’s tax season, and if you’ve filed for bankruptcy recently, you may be feeling a little nervous about it. The IRS has made it pretty clear what they expect from those who have filed for bankruptcy, or who will be filing soon, so you don’t have to worry. Your bankruptcy attorney can let you know what you need to do, when you need to do it, and if your should alter the timing of your bankruptcy filing to get the best outcome with your taxes.
If You Receive a Tax Refund
After you’ve filed your income tax return, there are two possible outcomes. You either owe money, or you’re getting a refund. If you receive a refund, you need to let your trustee know. If you spend the money to pay bills or on fun stuff before you let the trustee know, it could drag out and complicate your bankruptcy. Depending on the state or federal rules dictating your bankruptcy proceedings, and the size of your refund, you may have to turn it over to the trustee as an asset to repay debt. Failure to comply with reporting and turnover requirements to the trustee may result in the loss of your bankruptcy discharge.
If You Owe Taxes
Owing on your tax return can throw a wrench in the works of your bankruptcy if you’re not careful. The problem is that, when you file for bankruptcy, you agree not to acquire any new debt, and taxes count as debt. If you’re unable to pay your taxes, your bankruptcy could be dismissed. This is not a problem in a Chapter 7. Your attorney could have your bankruptcy converted to another type, though, such as from a Chapter 13 to a Chapter 7.
Chapter 13 is a very effective tool for dealing with taxes owed prior to filing. In many cases the taxes can be frozen and paid back without any additional interest or penalties being added. Further, if you file mid-year and end up owing taxes at the end of that year, it is sometimes possible to negotiate with the IRS to have those taxes also included in your repayment plan. The way you deal with owed taxes during bankruptcy proceedings is sensitive, and requires the expert advice of an experienced bankruptcy attorney.