You Can File A Bankruptcy If Your Taxes Arent Done Sort Of
The Bankruptcy Code requires you to provide the bankruptcy trustee a copy of your Federal income tax return for the most recent tax year ending immediately before filing the bankruptcy. So if you file bankruptcy in 2020, you are required to produce your 2019 tax returns. Failure to provide these returns to the trustee will result in the trustee moving to dismiss your case.
If you are able to file your tax returns before filing bankruptcy, you should. This makes everything easier. If your taxes arent done, we typically advise you to not file your bankruptcy until your returns are filed.
But what if theres an emergency? Lets suppose your house is being sold at a foreclosure sale and you havent file your tax returns. Can you file the bankruptcy? Yes, you can file bankruptcy if your taxes arent done, but youll need to supply your tax returns within 7 days of your 341 meeting of creditors. That means youll have about a month to prepare and file your returns.
Planning For Chapter 7
Here are some ways to increase your chances of keeping your tax refund in Chapter 7 bankruptcy.
If you file during tax season. Individuals who file bankruptcy during tax season often have to figure out what to do with the tax refund they have just received. You can use any available tax refund or wildcard exemption to protect it. But if your state doesn’t offer these exemptions, or you want to save your wildcard for other assets, consider these strategies:
- If possible, file for bankruptcy after receiving and spending your tax refund. If you choose to do this, be sure to use your refund on necessities and not to purchase new assets.
- Use your tax refund to pay your bankruptcy attorney for the fees and costs of your case.
These strategies have been found to pass muster in most bankruptcy cases because you’re allowed to use your assets to pay expected living expenses. Neither option involves an attempt to avoid paying a creditor, which is considered fraudulent in bankruptcy.
Adjust withholdings. If you expect a significant return because of amounts deducted from your paycheck, the fix is to adjust your tax withholding early in the year. Keep in mind that this tip won’t be as helpful if you change your withholding later in the year such as from October through December.
Bankruptcy Discharge Wont Remove Liens
While the automatic stay can stop new lien petitions, existing liens arent removed when you file. If you have a federal tax lien placed on any property because of back taxes that you owe, the discharge of that debt during bankruptcy wont remove the lien. Even if the debt itself is discharged during your bankruptcy, the lien must be paid. Make sure to do this as quickly as possible, so you dont have issues if you try to sell the property.
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Change Your Tax Withholding
If you plan to file for Chapter 7 in the next year, you can also avoid receiving a refund at all by adjusting your tax withholding so that you only pay the tax you owe. By doing this, youâll receive more money each month and you can avoid getting a tax refund. But you need to make sure you have savings to pay any tax bill when it comes due.
How Bankruptcy Stops The Irs
When you file a bankruptcy case, an injunction called the automatic stay goes into effect to stop creditors, including the IRS, from starting or continuing collection activity, like sending you letters, garnishing your wages or your bank account, or filing liens against your property.
The stay continues during the bankruptcy case. It can be lifted only by the bankruptcy court after a request by the creditor .
Once the bankruptcy case is over, the IRS will be free to resume collection activity unless the tax debt has been wiped out or paid in full.
Keep in mind that the automatic stay will go into effect the first time that you file for bankruptcy. However, that’s not always the case for subsequent filings. You could lose the stay if you’ve had repeated bankruptcy filings.
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What Happens If I Have Tax Debt That Cant Be Erased Yet
Plenty of taxpayers are in this boat, and they all have several legal options. An attorney can advise you on the best course of action, but ultimately, the decision is yours.
Pay in installments. Some people talk to the IRS about a payment plan. The IRS usually backs off once the taxpayer starts an installment agreement. After all, the IRS just wants the money. It doesn’t really want to garnish your wages. Keep in mind that installment agreements are only a good idea if you have the money. If thatâs not the case, you need another option.
Participate in the Offer in Compromise program. The IRS has many programs to help taxpayers pay their tax debt when they have little or no money. The main example is the Offer in Compromise program where taxpayers pay what they can, and the IRS forgives the rest. This program can be extremely complex, and few people qualify. Also, if the taxpayer has any assets whatsoever the IRS will force the taxpayer to sell them. Finally, while the taxpayer negotiates, the IRSâs harassing collections techniques continue.
A Different Way To File Taxes
The concept of bankruptcy is that you, as a debtor, surrender your right to handle your own affairs, and a trustee is appointed to oversee them, said Carl G. Archer, a bankruptcy lawyer with Maselli Warren, P.C., in Hamilton, New Jersey. Your affairs become part of an estate, the same way they would be if you were incapacitated or if you had died. The trustee’s sole responsibility is to pay creditors with any assets that aren’t exempt under federal or state law, whichever is applicable.
The confusion for taxpayers in bankruptcy springs from the requirement for the filing of two types of tax forms. One is for the individual and the other is for the bankruptcy estate.
As a Chapter 7 debtor, you would file your usual 1040 the same way you normally would any other time, Archer said. The trustee would not have anything to do with that because it’s not a debt it’s an obligation that you have to file that paperwork with the federal government. The trustee, however, would file a Form 1041 for the bankruptcy estate.
On the other hand, if a debtor files for bankruptcy under Chapter 11, he typically remains in control of the assets and will act as the bankruptcy trustee. The debtor acting as the bankruptcy trustee is required to file both the individual 1040 individual return and the 1041 bankruptcy estate return.
In the case of a Chapter 13 bankruptcy, the debtor pays disposable income into a monthly plan to pay creditors.
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Take Your First Step Towards A Debt Free Life
If you are overwhelmed by debt and live in the Toronto area, call us at 416-498-9200 to book a FREE, confidential appointment. We will review your financial situation in detail and discuss all of your options with you. Alternatively, you can fill out the form below and our team will reach out to you.
Status Of Borrowed Money
Whether you borrow from a commercial lending institution or a private party, you dont own that money, which remains the property of the lender. Interest you pay for the loan becomes a taxable gain for the lender. If you make money with the money youve borrowed, thats a different matter. You would then pay taxes on the gain. But whether the capital you used to make the money is yours or borrowed makes no difference in your taxes.
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Five Tips For Bankruptcy Filers
Carl G. Archer, a bankruptcy lawyer with Maselli Warren, P.C., in Hamilton, New Jersey, offers the following tips for individuals filing bankruptcy and an income tax return.
Remember, with TurboTax, we’ll ask you simple questions about your life and help you fill out all the right tax forms. With TurboTax you can be confident your taxes are done right, from simple to complex tax returns, no matter what your situation.
Which Tax Debts Get Discharged
Debtors can discharge some tax debt in bankruptcy, but not all. Taxes must meet the following criteria before being forgiven:
- The taxes are on wage-related income or gross receipts .
- The income taxes were due at least three years before you filed the bankruptcy.
- You filed your tax return at least two years before you filed the bankruptcy case. If you did not file a return, if you filed the return late, or if the IRS filed a substitute return for you, some bankruptcy courts have held that those taxes will never qualify for a discharge.
- IRS tax assessmentthe process of entering the tax on the books as a tax liabilityoccurred at least 240 days before filing for bankruptcy. This period could be lengthened if you had pending an offer in compromise or if you filed a prior bankruptcy case.
- You didn’t commit fraud or willfully try to evade paying your taxes for the tax year in question.
If you meet all of these factors, the chances are that your tax debt will be dischargeable. If not, your tax obligation won’t go away in a bankruptcy case.
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Can You Declare Bankruptcy On Taxes Owing
The short answer, for most people, is yes you can declare bankruptcy on taxes owing. In fact, 50% of the people that file personal bankruptcy include some form of tax debt. It is usually personal income tax, but also includes HST, source deductions, as well as directors liability for corporate tax debts. This applies to people that file bankruptcy and for people that file a consumer proposal. Canadian bankruptcy law doesnt differentiate between tax debts and other kinds of unsecured debt.
The long answer is still yes, you can declare bankruptcy on taxes owing, with the following restrictions:
Both of these things are quite rare you have to go out of your way and deliberately break the law in order for the Canada Revenue Agency to use these tools to collect your taxes.
There are a couple of other things that you need to be aware of, should you file for bankruptcy and have a tax debt.
Adjust Your Tax Withholding
If you think that you’re going to file for bankruptcy in the next year, you can avoid the refund issue by adjusting your tax withholding so that you only pay the tax you owe. You’ll get more money in each paycheck that you can use to pay for necessary expenses. It’s important to make sure, however, that you continue to withhold a sufficient amount to cover the taxes you do owe.
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I Need Advice About Filing For Bankruptcy
Washington DC and Maryland bankruptcy lawyer Kevin D. Judd is always ready to answer your questions, explain common bankruptcy myths and help you get through the bankruptcy process. He is knowledgeable about all aspects of and focuses on working with individuals and families dealing with large amounts of debt. For free attorney advice about bankruptcy, today.
Tax Refunds In Chapter 13 Bankruptcy
When you initially file for Chapter 13, you’ll need to protect your tax refund with an exemption to keep it, or use it for necessary expenses before filing, as discussed above. If you can’t, you’ll pay it to your creditors.
During your three- to five-year repayment plan, it works a bit differently. You’re required to contribute all disposable income to your Chapter 13 plan. If your plan pays less than 100% to creditors, the trustee can keep your tax refund. It won’t reduce your plan payment, however. Your creditors will receive the percentage of your total disposable income, which will include your tax return, that they’re entitled to under your plan.
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Tax Return And Refund Information
It is your responsibility to timely file all federal, state and local tax returns both prior to and after the filing of your Chapter 13 Petition. The Chapter 13 Trustee will not complete or file your tax returns for you. If your tax returns have not been filed or become delinquent during the course of your Chapter 13 plan, you may lose the protection of the Bankruptcy Court as your case may be dismissed. During the life of your plan, the Chapter 13 Trustee may periodically request copies of your federal, state and local tax returns. It is your responsibility to provide those documents when requested by the Trustee. If you experience issues with filing your tax returns, please contact your attorney.
The administration of tax refunds in a case can be confusing, so please make sure you understand your duties. Here is a quick summary of the administration of tax returns and tax refunds:
How Will An Automatic Stay Affect Tax Debt
The IRS has some fairly extensive rules on what the automatic stay will and wont do when it comes to your back taxes and their collection actions. As with any other type of debt, bankruptcys automatic stay will prevent most collection actions by the IRS, including:
- Collection letters and balance due notices
- Wage garnishment
- Tax refund offset, where they take your current refund to pay off existing tax debt
- Filing a new Notice of Federal Tax Lien
However, there are other IRS actions that the automatic stay wont prevent or stop. Even after you file for bankruptcy, the IRS can still:
- Do a tax audit to determine your liability
- Issue a notice of deficiency
- Issue a demand for a tax return if you have not filed yet
- Refile a Notice of Federal Tax Lien
- Intercept your tax refund for past-due child or spousal support
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Discharging State Income Taxes In Bankruptcy
Discharging State Income Taxes in Bankruptcy. FTB California State income tax can be burdensome and may contribute to a debtors decision to file for bankruptcy. Fortunately, state income tax is dischargeable in bankruptcy taxes under certain circumstances. Those circumstances are largely identical to the circumstances under which federal income taxes can be discharged, as the power of the bankruptcy courts are not affected by whether the taxes are state or federal.
First, the bankruptcymust be filed three years from the date the return was due . To give an example, the due date of the 2017 Form 540 was October 15, 2018. A 2017 California income tax liability cannot be discharged in bankruptcy until October 15, 2021.
Second, debtors seeking to discharge state income tax must have filed a tax return for the income tax on which they seek to have discharged. That tax return does not have to have been filed on time a late tax return filing will suffice, as long as the return was filed more than two years before the bankruptcy commences. However, under the current bankruptcy laws, state and federal taxes cannot be discharged in bankruptcy if the IRS or state files a return on your behalf.
Please contact usfor more information about bankruptcy anddebt settlement. RJS LAW is an honest, ethical and trustworthy law firm that can guide you through the process referring you to trusting professionals. Phone: 595-1655
Does Bankruptcy Clear Income Tax Debt In Canada
In most cases, income tax debt is treated similarly to other unsecured debt in a bankruptcy. When the bankruptcy is completed, the tax debt will be cleared along with other debts.
That being said, there are special rules that deal specifically with tax debts in bankruptcy. We recommend that you contact a Licensed Insolvency Trustee for a review of your situation. This is a good way to make sure you have explored all your options thoroughly, and at the same time you can confirm that your tax liability will be discharged if you successfully complete a bankruptcy.
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