October Tax Season: If Behind on Filing Tax Returns and I Owe Taxes, Should I File the Returns Before Filing Bankruptcy?

Bankruptcy can be a surprising good way to solve your tax problems. But first, got to prepare your returns to get good advice about options.

 If you know that you owe a bunch of income taxes, and a lot of other debts, you owe it to yourself to see what bankruptcy can do for you. Look at our last dozen or so blog posts to get an idea of the diverse ways it can help. Today we focus on what to do when you haven’t filed one or more of your tax returns.

Ignorance is Not Bliss

As you can probably imagine, the bankruptcy laws about income taxes are complicated. Under certain circumstances taxes can be written off (“discharged”) outright in bankruptcy, so that you never have to pay them. Or those taxes that can’t be discharged you can pay under extremely flexible and favorable terms.

But how any particular tax is treated depends on a series of facts and conditions. For that matter, even within each tax year the penalties and interest on a tax may be treated differently than the tax itself. To know how each tax, interest, and penalty will be treated in bankruptcy, the tax returns have to be prepared.

Deciding whether to file bankruptcy, and whether to file a Chapter 7 case or a Chapter 13 one, can’t be done wisely without knowing the whole picture. And that’s especially true if you owe more than one year of income taxes, and even more so if you have filed some tax returns and owe on them but have not filed on other returns and think you likely owe.

All this means that you need to prepare any unprepared your tax returns, preferably (although not necessarily) before you meet with an attorney. The advice you’ll get will only be as solid as the information you are able to provide about your taxes.

But sometimes you simply can’t get your tax returns prepared before you ought to see an attorney. If so, don’t let unprepared returns prevent you from getting whatever advice you need so that you can at least start heading in the right direction.

Unfiled Tax Returns and Bankruptcy

If you have unfiled tax returns, you will need to prepare and file them either before your bankruptcy case is filed or very shortly thereafter.

That’s because the bankruptcy system hates unfiled tax returns. Under Chapter 7, the bankruptcy trustee particularly wants to know whether you have any refunds owed to you, and wants to see proof through copies of your tax returns, no matter if you “know” you aren’t getting any refunds. Under Chapter 13, your payment plan will not be approved by the bankruptcy judge without all your tax returns being filed.

Timing is Everything

If you have any unfiled tax returns, generally you should quickly prepare but not file those returns before you go see your bankruptcy attorney. There are  many timing considerations related to when your tax returns are filed, including when that tax can be discharged in bankruptcy and what collection methods the IRS and/or state will likely try to take against you in the meantime. So, you can help your attorney help you if don’t take action before getting advice about your options and formulating a game plan. You may even be able to discharge more taxes through good pre-bankruptcy planning.  

 

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