April 15 TAX DAY: A final word on tax debt

It may seem impossible to pay the taxes owed and when faced with that impossibility, some people decide to not file their tax returns at all. I am not talking about filing an extension – I mean ignoring the whole issue. While there may be reasons to do this that are legitimate (though I cannot think of one) I am not a lawyer who is an expert in tax law or criminal law related to taxes. So, what I am writing is from a bankruptcy standpoint.

When looking at taxes from a bankruptcy standpoint, the best advice is to file your returns timely whether or not you can make payment at that time. Timely filing of your tax debt starts the running of certain time frames that can allow that tax debt to be discharged at a subsequent date. Failing to file would prevent that tax debt from being discharged.

If you have filed a bankruptcy during this current calendar year, then the filing of the return is essential to your bankruptcy moving forward. Most Chapter 7 trustees will insist on seeing the prior years return before they will “abandon” their interest in the estate in case there is a refund coming back in excess of exemptions. Chapter 13 trustees will insist on it because it is required by law and to see if you are withholding too much in taxes instead of paying enough into the Chapter 13 plan.

Finally, the return being filed only defines the exact amount refunded or owed. On 12/31 of last year, you either owed a tax debt or had a refund owed to you. Subsequently filing a bankruptcy does not change either of those circumstances. So, you might as well file the return to give definition to where you are at. If you are in a Chapter 13 and owe taxes from last year, they will be filed as a claim in the Chapter 13 and paid through the plan so you should NOT make payment with your return.