A common question I always receive from debtors is “do I have to do anything different when I file my tax returns?”
The short answer is no.
This article will address the actions a debtor must take in order to properly file a tax return with the Internal Revenue Service and have no negative impacts on their bankruptcy.
FILING TAX RETURNS WHILE IN BANKRUPTCY
There is no special address your return is sent to or a different website you have to use to file a tax return while in bankruptcy. Debtor’s file their returns the same way they filed prior to be in bankruptcy. Debtors may continue to use tax services like H&R Block, Jackson Hewitt, Turbotax and similar tax preparation companies. You may e-file your return the same way as anyone else.
The information on your return is reported exactly the same way as previous returns. There is no “special” bankruptcy box that you have to check. You report your W2 wage information, self-employment income, pension and/or retirement income exactly the same way as you have previously filed.
Moreover, if you are a person who is not required to file because you do not work or receive only Social Security Income, then you do not have to start filing a return simply because you are in bankruptcy.
In closing — you are required to do exactly the same thing you would be required to do under the IRS Tax Code whether you are in bankruptcy or not. This applies to a debtor who has filed a chapter 13 bankruptcy or a chapter 7 bankruptcy.
WHAT HAPPENS TO MY REFUND
You will receive your refund, if you are entitled to one, the same way as previous years. Tax refunds are delivered from the IRS via direct deposit or a mailed check.
While in an active bankruptcy, generally, any offsets to debtors tax refunds cease. Meaning, if your tax refund is typically seized because you owe back child support or are in default on a student loan, typically while you are in bankruptcy, you will receive your refund and the offset is not applied. The reason is because in most cases, the reason for the offset is being addressed through the bankruptcy; therefore, the reason for the offset no longer exists and the debtor is entitled to receive his or her tax refund.
Depending on the district where you file determines the amount of your refund you may keep. Each district, in a separate court order, will address its particular tax refund policy. The Northern District of Texas’ tax refund policy is as follows: the first $2000.00 of any refund is the debtor’s to keep and spend, and amount over $2000.00 must be turned into the Trustee to be disbursed to unsecured creditors.
WHAT IF THE TAX RETURN SHOWS I OWE MONEY TO THE IRS
If you are in an active bankruptcy and continue to incur debt to the IRS it could cause your case to dismiss. A debtor is not allowed to continue to incur debt while in an active bankruptcy; therefore, debtors cannot continue to file tax returns that show tax liabilities are owed.
Generally, in the first year of a chapter 13 bankruptcy, the IRS will allow a debtor to include the new tax liability in his or her chapter 13 plan payment, but in future years the IRS will file motions to dismiss cases based on a debtor’s continued incurring of debts.
How a debtor avoids owing money each year is increase the amount of money being withheld from your paycheck. If a debtor owes money to the IRS each year and the debtor is a W2 wage employee, it is likely that Debtor is not having enough money withheld each paycheck. In order to correct that problem the debtor needs to speak with his or her payroll administrator in order to have the federal withholding on his or her paychecks increased.
If you are a self-employed debtor and continue to owe the IRS then your quarterly estimated payments needs to be higher because the goal each year is to break even, not owe money and not get a refund.
ONE EXTRA STEP THAT IS NEEDED
The only real difference a debtor must do each year while in an active bankruptcy, this typically only applies to chapter 13 debtors, is they must provide a copy of the filed return to the Trustee in order for the Trustee to review what was filed with the IRS.
The trustee is not looking at the specifics of who you claimed as a dependent or what deductions you took — the Trustee is not an IRS auditor, The Trustee is verifying that you filed your return timely and whether you owe money or received a tax refund.
TIPS FOR FILING A TAX RETURN WHILE IN BANKRUPTCY
1. File your return early – do not wait until April 15th to file your return
2. Get a copy of your return to your attorney as soon as you file
3. If you get a refund, talk with your attorney to see what amount of the refund you may be entitled to keep.
4. Consult your payroll administrator to change your withholdings if you owe the IRS money when you file.