There are many reasons to file your tax returns. If you’re thinking about bankruptcy, here’s why you should get your tax returns filed first.
A few years ago, I had a client who needed to file for bankruptcy and was deep in debt to the government for unpaid income taxes.
The IRS and the state taxing authorities were coming after him, threatening wage garnishment. He was scared because his income was barely enough to get through each month.
His problems were magnified because he’d never filed tax returns for the years. As a result, the IRS assessed all the tax debts based on their calculations – not his.
He needed to get his tax returns filed to get him through bankruptcy.
Disclosing Your Income and Tax Information
The Statement of Financial Affairs for Individuals Filing for Bankruptcy, one of the documents you’ll need to complete to file for bankruptcy, asks for your income over the past two years. Of course, that means you’ll need to get your hands on that information, and tax returns are typically the fastest place to look. But, of course, you can get that information without a completed tax return. Still, the data is more challenging to get together.
Beyond that, you’re required by law to list all of your property – including any tax refunds you may be owed. If you still need to file your returns, you don’t know whether the government owes you money (many of my clients thought they owed money for taxes only to find out they were wrong). Furthermore, if you don’t list the refund, then you lose the right to claim it after your bankruptcy case is over.
Income Tax Returns In Chapter 13 Bankruptcy
However, the problem of unfiled taxes in bankruptcy hits you square in the face if you’re filing Chapter 13.
Under the U.S. Bankruptcy Code (11 USC 1308), you’re required to have tax returns filed for all taxable periods ending during the 4 years ending on the date of the filing of your bankruptcy case – and you’ve got until the day before your meeting of creditors to get it done.
Depending on where you file for bankruptcy, your local rules may also require that you provide copies of tax returns to the trustee assigned to your case. Without those filed returns, the trustee may have a bone to pick with you, ultimately going to the judge.
So if you need to catch up in filing your taxes and have everything lined up, you will run into severe problems when filing for bankruptcy under Chapter 13.
Income Tax Returns In Chapter 7 Bankruptcy
If you’re filing for Chapter 7 bankruptcy, you may have problems if you have not filed your tax return for the past year.
Under the U.S. Bankruptcy Code (11 USC 521(e)), you’ve got until 7 days before the meeting of creditors to provide the case trustee with a copy of your most recent tax return. Suppose you’ve been diligent about your obligations. In that case, this should be a snap, but if you’re sending along a 5-year-old return yet showing current income, then under 11 USC 521(f), it’s a different story.
You may be required to file with the court copies of your tax returns that are past due; you may also be required to file them with the court on a going-forward basis for a while.
All in all, those unfiled taxes will cause no small amount of headaches for you.
Unfiled Income Tax Returns Could Mean No Discharge
When you file for bankruptcy, all debts owed to the government, including unpaid taxes, must be included in the bankruptcy filing. If you file for Chapter 7 bankruptcy and have unfiled tax returns, those tax debts will not be discharged. In Chapter 13 bankruptcy, you will still have to pay the full amount of your tax debt through your repayment plan. This means that your tax debts will continue to accumulate interest and penalties, and you will be responsible for paying them off even after your bankruptcy is over.
Therefore, it’s essential to file your tax returns before filing for bankruptcy. Filing your tax returns early can help establish the amount and nature of the tax debt owed, accurately list your debts in your bankruptcy filing, and avoid disputes with the taxing authority. Your bankruptcy lawyer can also work with you to explore options for resolving your tax debt, such as negotiating a payment plan or an offer in compromise.
On the other hand, if you don’t file your tax returns before filing for bankruptcy, your lawyer won’t be able to deal with those potential obligations as effectively as possible. This may lead to complications in the bankruptcy process, and your tax debts may not be handled appropriately.
File Your Returns for Maximum Protection in Bankruptcy
My client filed 13 years’ worth of tax returns before we filed his bankruptcy case. Thankfully, he didn’t owe any money for many of those years and had a nice refund check on tap for the most recent two years. That refund offset much of what the IRS said he owed, and he could handle the remaining balance with a modest payment plan.
Had he not filed his returns, we wouldn’t have been able to list the refunds, which would have cut off his right to receive the money. As a result, his overall tax debt would have been higher, and he would have been unable to pay it off, given his financial situation. That would have cost him thousands of dollars in additional tax liabilities and financial headaches that would continue for years after his bankruptcy case was over.
The trustee may have asked the bankruptcy court to throw his case out of court due to failing to provide his tax returns, which would have jeopardized his case. Though we may have won the argument against the trustee, it would have cost my client more money in legal fees, to say nothing of the anxiety surrounding a dispute in court.
In the end, filing tax returns was the better solution. However, suppose you’re in a similar position. In that case, it’s a good idea to follow my client’s lead – file your returns before walking through the doors of the bankruptcy court.
ABOUT THE AUTHOR
Since I became a lawyer in 1995, I’ve represented people with problems involving student loans, consumer debts, mortgage foreclosures, collection abuse, and credit reports. Instead of gatekeeping my knowledge, I make as much of it available at no cost as possible on this site and my other social channels. I wrote every word on this site.
I’ve helped thousands of federal and private student loan borrowers lower their payments, negotiate settlements, get out of default and qualify for loan forgiveness programs. My practice includes defending student loan lawsuits filed by companies such as Navient and National Collegiate Student Loan Trust. In addition, I’ve represented thousands of individuals and families in Chapter 7 and Chapter 13 bankruptcy cases. I currently focus my law practice solely on student loan issues.
I played a central role in developing the Student Loan Law Workshop, where I helped to train over 350 lawyers on how to help people with student loan problems. I’ve spoken at events held by the National Association of Consumer Bankruptcy Attorneys, National Association of Consumer Advocates, and bar associations around the country. National news outlets regularly look to me for my insights on student loans and consumer debt issues.
I’m licensed to practice law in New York and California and advise federal student loan borrowers nationwide.