Can you file bankruptcy without filing a tax return?
The short answer to this question is yes. You can file bankruptcy without having filed your tax return. But if you haven’t filed your tax returns regularly, or if you have back taxes, you’re going to have issues when you file bankruptcy. Sometimes the issue is easily resolved. And sometimes, unfortunately, failing to file tax returns can be fatal to your bankruptcy case.
Are your taxes Ripe for Discharge?
In a Chapter 7 or Chapter 13 bankruptcy case, failing to file returns affects whether I’ll be able to discharge your back taxes. This is because the IRS has certain rules that determine the dischargeability of your income taxes.
The three rules are: more than three years must have elapsed since the tax return generating the liability was due, including extensions. The tax return must have been filed more than two years earlier than the bankruptcy petition (generally applicable to late-filed returns), and at least 240 days must have elapsed since the date of an IRS assessment(generally applicable to audit adjustments and amended returns). Also know that negotiations with the IRS can lengthen the time period and that if the IRS proves that you’ve done something fraudulent, these time frames are not applicable.
Reading those rules hopefully gives you insight on how failing to file a return can result in your taxes not being ripe for discharge. I don’t expect it to be totally clear to you–don’t worry. If you’re head is spinning stop reading and call my office to set up your consultation. If you’re a glutton for punishment read on:
Not ripe = Priority Unsecured Debt
Taxes that are not ripe for discharge are called Priority Unsecured debt, and they are treated specially by the bankruptcy code. Priority unsecured debt survives a Chapter 7 discharge–and this means that once your case is discharged the IRS will resume collecting the debt. In Chapter 13, priority unsecured debt must be paid off in the Chapter 13 plan. This is mostly why I wrote that tax issues can be fatal. In order to get your Chapter 13 case confirmed, you’ll have to be able to fund a plan that pays off the back taxes. While it’s true that tax debt helps you on the means test, it also increases the depth of your debt pool overall–and that fact can be fatal.
It’s worth it to determine where your tax liability stands. Yes, you can still file bankruptcy, but you’ll most likely find yourself coming clean with the IRS and filing your tax returns as part of your bankruptcy case.
I blogged earlier this year about what happens to your tax return in bankruptcy.
Call me, Attorney Shannon McDuffie to arrange your consultation. (404) 418-8879.