Many people are confused or concerned — or both — about filing taxes after bankruptcy. The first thing to keep in mind is that, while there are indeed some steps to take, the post-bankruptcy filing process should not a bureaucratic nightmare. Here is what you need to keep in mind:
After filing for bankruptcy, there are two returns associated with your identify/profile as a taxpayer as far as the IRS is concerned: an individual filing (Form 1040), and a return on behalf of your estate (Form 1041).
Filing Taxes After Bankruptcy: Chapter 7
If you have filed (or will file) for chapter 7 bankruptcy, then the two returns are completed and submitted separately. That is, you fill out and send a Form 1040 return, and the Bankruptcy Trustee fills out and sends a Form 1041 return on behalf of your estate.
Filing Taxes After Bankruptcy: Chapter 11
If you have filed (or will file) for chapter 11 bankruptcy, then you are typically in control of your assets, and also act as the Bankruptcy Trustee. Therefore, you fill out and send in both returns: Form 1040 as an individual, and Form 1041 on behalf of your estate.
What if You Get a Refund?
The majority of individual bankruptcy cases are chapter 7 filings, which likely means that you only need to focus on submitting one return instead of two. However, it is very important that you are aware of the second return, because the court-appointed Bankruptcy Trustee will typically want to know if you receive a tax refund, as this may be turned over to pay debt.
What if You Owe Taxes?
Also keep in mind that any taxes you may owe the IRS — along with any other debt that you incur after filing for bankruptcy — is not protected from collection, since it was not part of the initial disclosure. Since a chapter 7 bankruptcy filing is only allowed once every eight years, it is critical that you have a realistic plan to cover this debt. The bad news is that the IRS has recently started outsourcing collection to third parties that specialize in this area. The good news is you can contact the IRS and petition for a deferred and/or installment payment plan. However, it is critical to be proactive about this and meet all deadlines.
To learn more about filing taxes after bankruptcy, then contact the Law Office of Charles H. Huber today for a confidential consultation.