It’s hard to believe, but Tax Day 2017 is now just a little over six weeks away. This means that at some point in the near future people will need to sit down with either their accountant or their favorite tax preparation software to initiate the sometimes arduous process of completing their return.
As complicated as the federal income tax filing process can prove to be for individuals under seemingly ideal circumstances, imagine how confusing it can seem to those who have filed for bankruptcy. Indeed, it’s often not entirely clear to bankruptcy filers as to what they even need to file regarding their taxes.
According to the Internal Revenue Service, there are essentially two documents that need to be filed by those who have filed for bankruptcy: the Form 1040 (individual tax return) and the Form 1041 (estate tax return).
While this first filing requirement may seem perfectly logical, as it holds a taxpayer accountable for any income owed while also alerting a bankruptcy trustee to any refund that could be used to pay creditors, the second filing requirement can prove understandably confusing.
The reason for the Form 1041 filing requirement is that much like if you were to pass away or become incapacitated, filing for bankruptcy essentially makes your financial affairs part of an estate, such that another person is appointed to handle them entirely on your behalf.
In other words, the bankruptcy filer essentially cedes power over their financial affairs to the appointed trustee who is tasked with paying off their creditors using non-exempt assets. Hence, the reason for the Form 1041.
We’ll continue this discussion in our next post, breaking down the tax filing requirements for several forms of bankruptcy and examining the issue of accruing new debt.
If you have questions about this issue or would like to learn more about the fresh start offered by bankruptcy, consider speaking with a skilled legal professional.