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Understanding your tax requirements after a bankruptcy filing -- II

Last week, we began discussing how Tax Day 2017 is rapidly approaching, and how the already complicated process of completing a federal income tax can become even more so for individuals who have filed for bankruptcy given that it might be unclear as to what they are even required to file.

To that end, we discussed how the Internal Revenue Service essentially requires those who have filed for bankruptcy to file both the Form 1040 (individual tax return) and the Form 1041 (estate tax return), and why exactly the agency requires the latter.

Even knowing this information, many recent bankruptcy filers can still find the process of completing their income taxes unnecessarily confusing. That's because there is an automatic presumption that the responsibility for filing both the Form 1040 and the Form 1041 is theirs alone.

As it turns out, however, the responsibility for filing Form 1040 and Form 1041 depends upon the type of bankruptcy relief sought and secured:

  • Chapter 7: The bankruptcy filer/taxpayer must file the Form 1040, while the bankruptcy trustee must file the Form 1041 for the bankruptcy estate.
  • Chapter 11: The bankruptcy filer/taxpayer must file both the Form 1040 and the Form 1041 owing to their retaining control of assets and essentially serving in the role of the bankruptcy trustee.
  • Chapter 13: The bankruptcy filer/taxpayer must file the Form 1040, while the bankruptcy trustee must file the Form 1041 for the bankruptcy estate.

It's also important for those in this situation to understand that bankruptcy law generally prohibits filers from incurring any new debts/delinquencies while under the supervision of the bankruptcy court, and that the failure to remain current on any post-petition tax payments may qualify as such.

If this happens, Chapter 11 or Chapter 13 filers will typically see their bankruptcies converted to a Chapter 7, while Chapter 7 filers will really see no impact. That's because this new debt can't be discharged and will remain the responsibility of the bankruptcy filer/taxpayer who must deal with the IRS.    

Consider speaking with an experienced legal professional if you have questions about this issue, or would like to learn more about Chapter 7 or Chapter 13 bankruptcy. 

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