A few years ago I had a client who needed to file for bankruptcy. He was a talented musician who’d had a few good years but when tastes in music shifted he was left behind.
Now he was working an entry level job at 56 years old just to make ends meet. And he 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. His income was barely enough to get through each month, and he was scared.
His problems were magnified by the fact that he’d never filed tax returns for the years in question. All the tax debts were assessed by the IRS based on their own calculations – not his.
In order to get him through bankruptcy, he needed to get his tax returns filed.
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 in order to file for bankruptcy, asks for your income over the past two years. That means you’re going to need to get your hands on that information, and tax returns are typically the fastest place to look. You can get that information without a completed tax return, but the information is more difficult to get together.
Beyond that, you’re required by law to list all of your property – and that includes any tax refunds you may be owed. If you haven’t filed your returns then you don’t know whether the government owes you money (lots of my clients thought they owed money for taxes only to find out they were wrong), and 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
The problem of unfiled taxes in terms of filing bankruptcy, however, 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-year period 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 – and that will ultimately go to the judge.
So if you’re behind the times in terms of filing your taxes, and don’t have everything lined up you’re going to run into some severe problems when filing bankruptcy under Chapter 13.
Income Tax Returns In Chapter 7 Bankruptcy
If you’re filing Chapter 7 bankruptcy then you may have problems if you haven’t filed your tax return for the past year.
Under the U.S. Bankruptcy Code (11 USC 521(e)) you’ve got until 7 days prior to the meeting of creditors to provide the case trustee with a copy of your most recent tax return. If you’ve been diligent about your obligations 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 some period of time.
All in all, those unfiled taxes are going to cause no small amount of headache for you.
Unfiled Income Tax Returns Could Mean No Discharge
On a larger scale, when you don’t file your tax returns prior to filing bankruptcy there’s going to be an issue with respect to how those debts are handled in the case. Not only won’t unfiled tax debts be discharged in a Chapter 7, they won’t be paid out in a Chapter 13.
It’s a better idea to file your returns before walking into bankruptcy court so that your lawyer can help you deal with those potential obligations now rather than having them loom larger later.
File Your Returns for Maximum Protection in Bankruptcy
My client ended up filing 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 was able to handle the remaining balance with a modest payment plan.
Had he not filed his returns then we wouldn’t have been able to list the refunds, which would have cut off his right to receive the money. 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, as well as 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 a failure to provide his tax returns, which would have put his case in jeopardy. 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 an argument in court.
In the end, filing the tax returns was the better solution. If you’re in a similar position, it’s a good idea for you to follow my client’s lead – file your returns before walking through the doors of the bankruptcy court.