Posted by KLSM CPA Firm PLLC

Bankruptcy & Your Tax Return

Bankruptcy & Your Tax Return

These are probably two words you want to see in the same sentence: Bankruptcy and tax returns. Some people panic at the idea of filing tax returns for bankruptcy, but it doesn’t have to be a challenge so long you are aware of what to look out for when filing. 


There is still life after a bankruptcy experience, and yes, it includes filing your taxes. People who file bankruptcy must ensure that some things are fine when handling their taxes. The IRS has its Publication 908, a Bankruptcy Tax Guide, which can serve as a practical guide for everyone in this situation. 


IRS bankruptcy program entails a debtor filing a separate tax return or requesting for a delay. If the debtor doesn’t do this, bankruptcy circumstances will either be transformed or dismissed. Additionally, a bankruptcy trustee must issue a tax return for trusts and estates using Form 1041. 


Regardless of the time, the filing limit may seem too near, particularly if you are thinking about going for bankruptcy. With some scheduling and preparation on your path, you will know how to manage this phase of your life to avoid stress. 


A diverse method of filing taxes

The entire bankruptcy process entails you, the debtor giving up your privilege to manage your businesses, and an executor is chosen to take over all your affairs. Your affairs will become a portion of a legacy like what happens when a person dies. The trustee will reimburse creditors with the assets exempted from central or state laws (Whatever is applicable). 


Five quick tips for people filing bankruptcy 

  1. File the taxes on time every year. The IRS will assess separate penalties for an inability to file and discover if you owe them money (even if you decide not to file). To save time, file on time, and adhere to all deadlines. 


  1. Work with an attorney specializing in bankruptcy cases and inform him if you have already filed a tax return for the prior three years (each of the years). 


  1. If you haven’t filed for that particular year, please consider doing it before filing for bankruptcy. You should only delay if you know that you will get a substantial refund.  


  1. If you have already filed, then ensure that the attorney gets all the tax records and explain how you utilized any refund money you may have. A bankruptcy trustee will want to know this information.


  1. If you receive a refund and want to file for bankruptcy, don’t pay your bills with the refund money. Paying your bills with it will lessen the pace of the bankruptcy process. 


A significant requirement for bankruptcy is this: the debtor is not supposed to get additional “aberrant balances” while still under court supervision. Taxes are viewed as fresh debt if the individual cannot pay them, which can either mandate the law court to discharge or adapt your bankruptcy case. 


Any new debt you acquire when you have already filed for bankruptcy will not be sheltered from assemblage by your bankruptcy because it wasn’t initially filed. More so, an inability to pay post-petition taxes will not affect your bankruptcy situation nor will it affect the tax debt. 


Some taxpayers who have filed for bankruptcy and are still in the process go-ahead to file their tax returns which is a mistake you should avoid. Before filing your tax returns, you’ve got to know all bankruptcy details as well as the different ways to file your taxes. 


Yes, it does seem like a difficult time for you, especially if it is your first bankruptcy experience. To avoid feeling overwhelmed, work closely with a tax professional who will walk you through the process.


FOR MORE INFORMATION ON HOW KLSM CPA FIRM, PLLC. CAN BEST HELP YOU WITH YOUR TAX FILING NEEDS, PLEASE CLICK THE BLUE TAB ON THIS PAGE.


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