If you have decided to file for bankruptcy, you may wonder what the proper procedure is for filing your income tax return.
Whether you opt for Chapter 7 or 13, you must file your tax return as usual, but the bankruptcy trustee will also file a return, which some people find confusing.
About your 1040
Remember that your tax payment is an obligation rather than a debt. If you file for Chapter 7 bankruptcy, you must either file an individual income tax return or ask the IRS for an extension. If you fail to do so, your trustee could ask the court to dismiss your bankruptcy case. If you file Chapter 13, you agree to pay your debts through a payment plan. If you fail to file your taxes, you could find your Chapter 13 converted to a Chapter 7 whereby the trustee will sell your assets to pay your creditors.
A 1041 is also required
In addition to your individual return, your trustee must file a 1041, which is the tax return for your Chapter 7 bankruptcy estate. If you file Chapter 13, you have an ongoing duty to file your taxes in a timely fashion and provide your trustee with the returns. If you are due a tax refund, you must also give that to your trustee so it can be used toward payments to creditors.
If you cannot pay
When you file for bankruptcy protection, you are not permitted to acquire any delinquent balances. If you cannot pay your taxes, the court could see the obligation as new debt and dismiss or convert your bankruptcy case. The way to deal with the issue is to go ahead and file your tax return. If you cannot pay the full amount, work out a payment plan with the IRS.
Tax tips for bankruptcy filers
Let your bankruptcy attorney know the status of your income tax filings. If you have already filed prior to filing Chapter 7 or 13, provide your attorney with your complete tax records. If you received a refund, explain how you used it because the trustee appointed to your case will ask. Remember to file your taxes on time to avoid the penalties the IRS can assess.