Special Tax Considerations In Bankruptcy

May 9, 2011

In today’s struggling economy, more individuals and businesses are filing bankruptcy each day than ever before. The saying “you don’t know what you don’t know” is never truer than in the tax considerations in Bankruptcy.

Of course, I can’t go over all the rules/regulations in the space provided. However, let’s cover some basic information.

Failure to file tax returns timely or obtain an extension can cause a bankruptcy petition to be converted to another chapter or dismissed. In chapter 13 cases, the debtor must file all required tax returns for the periods ending within 4 years of the filing of the bankruptcy petition.

Not all debts may be discharged depending on the chapter and the nature of the debt. For discharge of unpaid tax under chapter 7, taxes for which no return was filed, taxes for which a return was filed late after 2 years before the bankruptcy petition was filed, taxes for which a fraudulent return was filed, and taxes that you willfully attempted to evade or defeat are NOT subject to discharge. There can be different rules under chapter 13 as a payment plan.

What happens to a cancellation of debt that the debtor must generally include in income such as a 1099-C? The debtor may not have to report the entire amount of canceled debt as income under a bankruptcy exceptions.

Two very good Internal Revenue Publications are Pub #908 & #334. Also the instructions for Form 982 could aid you in this very difficult area of tax considerations.

If you are thinking you are filing bankruptcy to discharge taxes due, you may find out too late that you have missed one of the important timing deadlines to include those particular taxes.

Please seek out professional guidance from an Enrolled Agent or a Bankruptcy Tax Attorney experienced with bankruptcy issues prior to filing.