Understanding Bankruptcy Taxes

Experiencing bankruptcy can be a stressful time. While it can be a relief to feel like your finances have a chance to start over, it can destroy your credit or even cause you to lose your home (if you have to file chapter 7). 

However, there’s another side of bankruptcy that’s not always thought about:  tax issues. Bankruptcy and taxes can be tricky to maneuver. That’s why we’ll go over the four major tax matters associated with bankruptcy so you can be better prepared to handle them before they arise. 

Some of these issues can cause your bankruptcy discharge request to be denied, so they must be taken seriously and understood beforehand.

1. Dischargeability of Taxes

When you declare bankruptcy, certain taxes may be dischargeable so that you don’t have to pay them. However, there are different rules for different types of taxes. For example, income taxes are generally dischargeable 3 years after a timely filed tax return. The 3 years can be extended by certain events. Additionally, if a return was not timely filed, then a different time period will apply.

Certain taxes simply won’t be discharged. For example, you’ll always have to pay trust fund taxes and trust fund recovery penalties, regardless of how old they are..

2. Unfiled Tax Returns

If you did not file a tax return, the taxes are not dischargeable. Unfiled returns can also result in dismissal of your bankruptcy case or prevent confirmation of your bankruptcy plan.

If you have unfiled tax returns or back taxes, it’s critical to consult a tax attorney BEFORE you file bankruptcy. When you file for bankruptcy, you must show your tax return from the previous year. So if you’re filing for bankruptcy in 2022, you’ll need to show the returns from 2021. 

You should only consider filing for bankruptcy before filing your tax returns in an emergency situation (which your tax attorney will be able to help you navigate). However, if you do this, you must send your tax returns within a week of your 341 creditors meeting.

3. Tax Liens

A federal tax lien is a legal claim from the government against your house or property when you fail to pay an outstanding tax debt.  In certain cases, a tax lien may have to be paid during the course of a bankruptcy.  In other cases, tax liens filed before your bankruptcy petition will remain attached to your property even if you get a bankruptcy discharge. No matter the situation, it is important that you understand what will happen to your tax lien before you file a bankruptcy petition.

4. Post-Discharge Collection

With bankruptcy and taxes, all dischargeable taxes are not collectible after you receive a discharge. As discussed earlier, some taxes are dischargeable and others aren’t. Also, if a tax lien was filed before you filed your bankruptcy petition, the IRS may be able to seize and sell your prep-petition property after a bankruptcy discharge.

In Bankruptcy, Trust Your Taxes With A Tax Professional

These aren’t the only issues that arise with bankruptcy and taxes. Other matters include the effect of bankruptcy on the statute of limitations and collection activity. If you’re going through bankruptcy, you need to meet with a professional to avoid making a costly mistake. 

Contact tax lawyer Mindy Meigs to ensure you fully understand tax and bankruptcy issues to make the most of your bankruptcy filing.