Navigating the Complicated World of Bankruptcy

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Bankruptcy And Your Tax Returns

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You might be startled at the interest the bankruptcy courts show in your tax filing status. Your income, the taxes you might owe, and other aspects of your tax situation play a role in your bankruptcy in several ways. Read on to learn more.

Chapter 7 and Tax Return Status

In most cases, the bankruptcy trustee will want to see a copy of your most recent tax return. If you have not yet filed your taxes, be ready with an explanation as to why not. The income on your return should match up with what you stated in your bankruptcy forms. If you are owed a refund, it might become the property of the bankruptcy court.

Chapter 13 and Tax Return Status

This type of bankruptcy filing might call for you to provide copies of the last four years of tax returns. When it comes to your most recent tax year return (if you have not yet filed your taxes), several things could happen:

  1. An estimated return. You might be asked to file a return based on estimates of your income and deductions. These estimates are based on your past returns.
  2. Motion to comply. You might be provided with a certain amount of time with which to file your return.

Tax Debts and Chapter 7 Bankruptcy

If you end up owing money to the IRS, you cannot list that obligation on your bankruptcy forms. Tax debts are not forgiven under any circumstances. You can, however, explore alternative options to paying the full amount by doing some research on the IRS website. The option to use installment plans and offers in compromise are two remedies to owing the IRS money. One additional issue is tax liens. When you fail to pay your taxes, the IRS has the power to place liens on your real property, which prevents the sale of it. As a result of filing a chapter 7 bankruptcy, no new liens will be placed on your property, but liens connected to previous tax debts (if any) remain in place.

Tax Debts and Chapter 13 Bankruptcy

This form of bankruptcy treats your past tax debts with more flexibility than a chapter 7 filing. For example:

  1. Tax debts older than three years may be discharged in whole or part.
  2. Tax debts that are not discharged won't incur interest or penalties as long as you are in a chapter 13 status.
  3. Tax liens can be removed using a chapter 13 repayment plan.

Taxes are a complicated issue no matter which type of bankruptcy you use. Speak to your bankruptcy attorney, such as Charles J Schneider PC, to learn more about the tax issue.