So, you have decided to declare personal bankruptcy through chapter 13 and everything seems to be going great. It appears you have everything in order. There may be one little hitch though: you didn’t file a previous year’s tax return. How will this affect your case when you decide to declare personal bankruptcy?
Unfilled Tax Returns Can Stop You When You Choose To Declare Personal Bankruptcy
It isn’t unusual to not have to file a tax return. According to the IRS Publication 501, single individuals under the age of 65 who make less than $9,350 a year are not obligated to file taxes. This publication also states when other individuals are not legally obligate to file. However, this doesn’t mean they shouldn’t. There are certain benefits to filing taxes outlined by the IRS at www.irs.gov, such as earned income credit, American opportunity credit, or additional child tax credit.
If you decide not to file your taxes, however, this may affect you when you declare personal bankruptcy. The IRS and your state department of revenue are both usually included in the list of creditors who must be notified when you declare personal bankruptcy. Once these offices are notified, they may decide to file a claim for estimated liability.
An estimated liability claim amount usually depends on how much money you earned in previous years, when you did file tax returns. For instance, if you only earned a little over $2,000 in 2009, but filed a tax return in 2008 stating you earned $47,000, the IRS will assume you made the same amount in 2009. Unfortunately, this is not always the case. You may have been fired from your job or laid off. However, this is the assumption the IRS will make, and they will also include any interest, tax liability, and penalties in the estimated liability claim.
Without the proof of a tax return showing you earned no income in 2009, the trustee for your bankruptcy case will either:
- Require a written statement from you stating you were not legally obligated to file your taxes for that year due to a low gross income.
- Dismiss the bankruptcy case due to the fact that your debt to the IRS and the state revenue department is not known.
- Hold off on the creditors meeting for up to 120 days. Your lawyer may have to request this if it is not done automatically. During the 120 days, you must ensure you have filed your tax returns for the past four years.
- Convert the case to a chapter 7 bankruptcy case, depending on the amount of money you are perceived to owe from the estimated liability claim and the best interest of both you and the creditors.
Take Care of Your Taxes Before You Declare Personal Bankruptcy
Before you choose to declare personal bankruptcy, make sure all of your taxes are taken care of. Even if you do not make enough money during the year to file taxes, file anyway. This will ensure you have a tax return to show the court should you decide to declare personal bankruptcy in the future. Also, filing your taxes allows you to enjoy many of the government benefits set up specifically for low income individuals, such as the earned income credit.
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