Bankruptcy & Income Tax Returns

The normal rules of how to file an income tax return and when to expect your refund don't apply if you're currently undergoing a bankruptcy proceeding. Instead of only being forced to adhere to the rules and guidelines of the IRS, you're now also beholden to the rules of the bankruptcy court. This added layer of rules usually prolongs your return processing and makes the overall process of filing a return much more complicated than it would be had you not filed for bankruptcy.

Significance

Taxpayers who are undergoing a bankruptcy proceeding will be appointed a trustee. The trustee will be responsible for overseeing the debtor's finances and be accountable for all property and income received. The trustee, along with your attorney, will also be responsible for ensuring that you are compliant with bankruptcy law and that your returns are filed and processed.

Features

Filing bankruptcy creates what's commonly called a bankruptcy estate. The estate includes all assets that belong to the debtor at the time the bankruptcy is filed. All income that is received after the bankruptcy filing is considered to be a part of the debtor's estate. This will not affect the processing of a return, but it will affect any refund that you may be entitled to since that refund will now be a part of your estate.

Types

Taxpayers can file bankruptcy in Chapters 7, 11, 12, or 13, and there are a variety of specifications outlined for each type of bankruptcy. Chapters 7 and 11 bankruptcies treat the bankruptcy estates as separate entities from the individual taxpayer, while chapters 12 and 13 do not. If you need additional help with regards to how to file taxes for your particular type of bankruptcy, contact your bankruptcy attorney or call the IRS at 214-413-5351.

Time Frame

The normal time frame for processing a tax return is six to eight weeks for mailed returns and 10 days for electronically filed returns. With bankruptcies, however, the time frame is extended to 16 weeks. This is partly due to the fact that bankruptcy returns, unlike normal returns, are not processed automatically. Instead, they are manually processed by an Internal Revenue Service employee.

Risks

Taxpayers who have filed bankruptcy must also file a timely income tax return in accordance with the Bankruptcy Abuse Prevention and Consumer Protection Act. If taxpayers undergoing bankruptcy do not file a timely return, they are in danger of having their bankruptcy dismissed or transferred to another chapter.

References

• IRS Publication 908: Bankruptcy Tax Guide
• Internal Revenue Service: New Bankruptcy Law Changes Debtors’ Responsibilities
• Internal Revenue Service: Tax Topic 201-The Collection Process