Category Archives for Statute of Limitations

Eliminating Income Taxes In Bankruptcy (Part 3)

Should My Client File for Bankruptcy Before or After Taxes?

They won’t gain any real advantage by waiting to file their income tax return until after filing a bankruptcy case. But, there are many reasons you’ll want your clients to be current when filing their Chapter 7 or Chapter 13 bankruptcy case.

Tax Returns and Chapter 7 Bankruptcy

When your client files for Chapter 7 bankruptcy, the trustee assigned to oversee their case will ask for their most recently filed tax return. That doesn’t necessarily have to be the tax return for the last tax year, but if it isn’t the most recent return, the trustee will ask for a written explanation.

The trustee will compare the income reported on their return to the amount listed in their bankruptcy paperwork. If they show that they’re due a refund, the trustee will also want to check that they have the right to protect (exempt) it and that the proper exemption amount has been claimed. If not, they would be required to turn the refund over to the trustee, who would, in turn, distribute it to your client’s creditors.

Many people plan to use the return for necessary items—such as living expenses—before filing a bankruptcy case. If they choose this approach, it’s a good idea for your client to keep records of his or her expenditures.

Tax Returns and Chapter 13 Bankruptcy

Your clients must be up to date on their tax returns before filing a Chapter 13 case, but the rules allow a little wiggle room. They will need to provide copies of the returns for the previous four tax years to the Chapter 13 trustee before the 341 meeting of creditors (the hearing that all filers must attend). If they are not required to file a return, their trustee might ask for a letter, an affidavit, or a certification explaining why. Sometimes local courts will impose additional rules for documents in their districts.

If your client owes the IRS a return but doesn’t file it before your 341 meeting of creditors, things can happen to derail their case.

• A motion. The trustee will file a motion giving them a very brief period to provide their returns. If they miss the deadline, the court can automatically dismiss their case, leaving you no chance to plead their case to the judge.
• A substitute return. The IRS might file a “best estimate” claim based on your client’s past income. The problem? IRS estimates are almost always higher than what they would owe after filing a proper return.

As you can see, the rules governing the discharge of tax debts in bankruptcy proceedings can be quite complex. With the information using the TDD tool will provide, an experienced bankruptcy attorney can determine if their clients can discharge their income tax liability and whether other options may be available in their specific cases.

This is the last of a 3-part article on eliminating income taxes in bankruptcy. Parts 1 and 2 have been featured in recent TDD newsletters (you can click here on part 1 and part 2 to revisit the articles). If this article raises any issues or questions that you’d like to discuss – or if you have any questions about the TDD tool in general, please feel free to email me at larry@taxdischargedeterminator.tax or you can call me at 833-879-9210.