Income taxes stop for no one. Even after you die, someone will need to file a final income tax return for you.
If you recently filed for Chapter 7 bankruptcy, you may wonder how it will affect your income tax filing this year. First, it’s crucial to understand that you are still responsible for submitting your Form 1040 and other necessary federal and state forms by Tax Day or requesting an extension.
Note that if you haven’t yet filed for bankruptcy, it’s typically best to submit your tax returns first. The main exception to that is if you’re expecting a significant refund, which could affect your bankruptcy filing.
While you’re responsible for filing your income taxes, your bankruptcy trustee needs to submit Form 1041, which solely deals with the bankruptcy estate. The same is true if you have a Chapter 13 bankruptcy. However, since that involves a multi-year repayment plan, you would need to provide the trustee with some documentation before they file their 1041.
What if you owe taxes you can’t pay?
Even if you were able to discharge the previous tax debt you owed in your bankruptcy, what if you end up owing money you don’t have when you file your return this year? That could be a problem.
When you file for bankruptcy, you’re prohibited from acquiring new debt you can’t pay. That’s not protected by your bankruptcy, so you have to find a way to pay it or risk having your bankruptcy dismissed.
Whatever you do, don’t ignore your taxes because you can’t afford to pay what you owe. That’s just going to bring additional fines and penalties. You may be able to negotiate a payment plan with the IRS so that you can pay what you owe over time.
It’s always better to ask questions about any financial matter (including taxes owed and refunds) that could affect your bankruptcy than to assume you know the answer. Having experienced legal guidance throughout the process can help you get through your bankruptcy and emerge on the other side with greater financial stability.