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July 13, 2018

Sometimes bankruptcy is the best way to address overwhelming debt and start your financial life over with a clean slate. However, the bankruptcy laws and processes are complex and it’s easy to make a mistake. That’s why the guidance of a knowledgeable bankruptcy attorney is so essential.

Four issues to avoid

Here are four issues you need to avoid with your tax returns if you plan to file for bankruptcy:

1. Do not delay in filing your income tax returns. Bankruptcy courts view more favorably those debtors who have made a good faith attempt to comply with tax laws and filing requirements. Tax debts are treated uniquely under bankruptcy law. Generally, the older the tax liability, the more likely the court is to discharge it in Chapter 7, as long as the debtor has not been engaged in tax evasion.

2. The issue of discharge becomes more complicated if taxpayers file late returns. In that situation, the court must determine whether a late-filed tax return falls within the Bankruptcy Code’s definition of “return,” which requires that a return satisfy all non-bankruptcy laws and applicable filing requirements. If the late filing does not meet this criterion, the tax debt for that year cannot be discharged.

Two recent cases dealt with whether a late return satisfies “applicable filing requirements”. The Third Circuit, in In re Giacchi, held that the late-filed returns did not constitute returns, noting that forms filed after the IRS had already made a substitute assessment are not an honest attempt to comply with tax laws. The Bankruptcy Court for the Northern District of California ruled similarly in In re Van Arsdale, that a debtor’s late tax return was not a “return” under the bankruptcy code, since the debtor filed it after the IRS had already filed a substitute return.

Do not delay in filing missing tax returns. In Chapter 13 bankruptcy, tax debt is included with other types of debt in your repayment plan. Here, you must make sure that all tax returns required during the 4-year period before the date of your petition have been filed before the first date set for your meeting with the creditors.

3. Do not forget to supply the bankruptcy trustee with a copy or transcript of your return for the most recent tax year before you filed for bankruptcy. This must be received at least 7 days prior to the meeting of creditors. Never give a trustee your only copy of a tax return or amendment. Always keep extra copies, since any interested party can request these.

4. Do not expose your Social Security number, bank account numbers, birthdates, and other personal data when submitting tax returns to the trustee and court.

Keep in mind that once you file for bankruptcy, your tax obligations are not automatically stayed. Continue to file timely returns as you would normally for taxes that come due after your bankruptcy case commenced. Moreover, continue to track your income and expenditures.

Consult a knowledgeable Texas bankruptcy attorney

Be sure to consult an attorney and provide them with your tax records and filing history. To learn more about bankruptcy and how it affects your taxes, contact an experienced bankruptcy lawyer at Marcos D. Oliva, P.C.

About the Author: Marcos Oliva Marcos Oliva is the principal attorney at Oliva Law. He is admitted to practice law in the State of Texas, the United States District and Bankruptcy Courts in the Southern District of Texas, and the United States Patent and Trademark Office.

Jul 13th, 2018