If you are considering filing for bankruptcy, ensure your tax returns are current. You will gain no meaningful advantage by delaying filing your income tax return until after filing for bankruptcy. Nonetheless, there are many reasons why you should be current when filing your Chapter 7 or Chapter 13 case. Schedule an appointment with Benenati Law Firm to learn more about bankruptcy and how a lawyer can help you. 

Tax returns and Chapter 7 bankruptcy 

When you file for Chapter 7 bankruptcy, the trustee in charge of your case will request your most recent tax return. That does not have to be the tax return for the most recent tax year, but if it is not, the trustee will seek an explanation. 

The trustee will compare your income on your tax return to the amount mentioned in your bankruptcy paperwork. If you prove that you are entitled to a refund, the trustee will want to ensure that you have the right to protect (exempt) it and that you have claimed the appropriate exemption amount. If you do not, you must give the return to the trustee, who will divide it among your creditors. 

Many people schedule their bankruptcy to use the proceeds for necessities like living expenses before filing. If you follow this route, keeping track of your expenses is a good idea. 

Tax returns and Chapter 13 bankruptcy 

Generally, you must be current on your tax filings before filing a Chapter 13 case, although the regulations provide some leeway. Before the 341 meeting – which is hearing that all filers must attend – of creditors, you must submit the Chapter 13 trustee with copies of your returns for the preceding four tax years. 

If you are exempt from filing a return, your trustee may request a letter, a certification, or an affidavit stating why. Local courts may establish additional regulations for papers in their districts on occasion. Things can go wrong if you owe the IRS a return but fail to file it on time (before your 341 meeting with creditors). 

  • A motion.  

The trustee will file a motion providing you with a very short period to submit your returns. If you miss the deadline, the court may immediately dismiss your case, leaving you with no opportunity to present your argument before the judge. 

  • A substitute return. 

The IRS may be required to make a claim based on its best guess of what you owe based on your previous income. What is the problem? Estimates from the IRS are almost always greater than what you are likely to owe after filing a full return. This is why it is important to seek the help of an experienced attorney.