For many people, tax time is a good time because they get back a healthy return that puts some extra money into their pockets. If you are currently in bankruptcy, though, it may affect your taxes and your refund.
Keep in mind that the bankruptcy court has control over all your non-exempt assets, which may include your tax refund. The court can take these assets and use them to pay back your creditors. In some cases, according to Money Crashers, that may mean the trustee can take all or part of your federal refund as part of your estate assets. There are additional things that you should know about how bankruptcy affects your taxes.
Trustee rights
The trustee in your case does have a right to request to see your current tax return. He or she will typically inspect the return to see if any refund would qualify as an estate asset. Additionally, the trustee must make the request in writing.
Filing requirements
According to the IRS, if your bankruptcy is not yet final, you must file your federal taxes on time or request an extension. If you do not file your taxes, it could cause the trustee to dismiss your bankruptcy case. The trustee may also convert your case to a different chapter.
Shortening your tax year
You have the option to shorten your tax year and turn it into two tax years that are each under 12 months. If you like, you can end your first tax year on the day before you file your petition. The second tax year begins on the day that you file your petition. It is important to know, though, that if you only have nonexempt assets, you cannot do this. Doing so allows you to discharge some taxes you owe in the bankruptcy, which can leave you in a better place after your bankruptcy discharge.