In order to achieve a fresh start after filing for Chapter 7 bankruptcy, it is important for people in Florida to stay current with their financial obligations, during and after their cases. This includes filing their taxes on time and paying any applicable liabilities. Failing to do so could have serious implications on their cases, as well as on their financial futures.
According to the Internal Revenue Service, once their Chapter 7 bankruptcy cases have commenced, people are required to file their tax returns or get an extension before they come due. If they do not, their cases may be dismissed. Consequently, they would resume liability for their debts and any stayed collection efforts could begin again.
Short tax years
For the year in which they file their bankruptcy petitions, people have the option to divide it into two short tax years. The first tax year closes out the day before the start of their cases and the second tax year begins on the day of their cases’ commencement. If they choose this option, the first year’s tax liabilities are not subject to the bankruptcy discharge. Additionally, their federal tax liability for the first tax year can be claimed against their bankruptcy estates.
The bankruptcy estate
Known as the liquidation bankruptcy, a court-appointed trustee is responsible for and in control of the bankruptcy estate for the duration of the case. For tax purposes, the bankruptcy estate is treated as a separate taxable entity. As such, the trustee is required to file Form 1041 on behalf of the estate.
Federal tax refunds
While their Chapter 7 bankruptcy cases are in progress, people can still receive their tax refunds. According to the IRS, these refunds may be garnished and used to offset any outstanding tax debts they may have. Additionally, the bankruptcy trustees may also request that any refunds received be turned over to the estates and applied toward people’s debts.