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What You Must Know About Income Taxes and Bankruptcy (Before You File)


File taxes before bankruptcy

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If you are neck deep in debt and considering bankruptcy, you may owe income taxes as well. We are frequently asked by new clients if owing back taxes will prevent them from filing bankruptcy. The short answer is no and depending on how long the tax debt has been outstanding, you may even be able to discharge it as part of your bankruptcy filing. If you haven’t filed your tax returns though, that’s another story. Here’s what you must know about income taxes and bankruptcy:

Unfiled Taxes May Become an Issue When Filing Bankruptcy

If you haven’t filed your tax returns, this can be a roadblock to filing your chapter 7 or chapter 13 bankruptcy. In a chapter 7 case, you will be asked to provide (at a minimum) your prior year tax return. For a chapter 13, you may be asked to produce your last several years of tax returns. And in either case, you’ll be asked whether you owe income taxes. Even if you haven’t filed your returns, if you know you owe taxes, the answer must be “yes” and that can trigger follow up questions that will reveal you owe taxes.

Unfiled taxes can cause problems in bankruptcy

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Debt Due to Unfiled Tax Returns Is Not Dischargeable in Bankruptcy

You may believe that taxes are forever, but that’s not always the case. If you filed your tax returns in a timely manner but just couldn’t pay the taxes owed, you may be able to get these tax debts wiped out in bankruptcy. The rule of thumb is that your return must have been filed within a certain time frame and the tax debts may not be taxes due calculated by the IRS on a substitute return (which is what they file on your behalf if they are aware that you have income yet neglected to file).

Lying About Unfiled Taxes or Tax Debts Will Land You in Hot Water

No matter what your financial circumstances are, you must always be honest with your North Carolina bankruptcy attorney and the bankruptcy court about your income, debts and taxes. Otherwise, you can be accused of committing fraud and face criminal charges. If you haven’t filed your taxes (for whatever reason) don’t say that you have. Be honest with your attorney about which years you have filed and haven’t filed and what taxes the IRS says you owe.

Tax debt can be discharged in bankruptcy

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Catching Up on Back Returns May Be Required Prior to Discharge

If you haven’t filed any tax returns in recent years, you will need to get caught up on one or more years prior to filing your bankruptcy petition or receiving your discharge. How many years you will need to file will depend on your circumstances and the type of bankruptcy you are filing. For specific information, you’ll need to consult an experienced, reputable North Carolina bankruptcy attorney like John T Orcutt.

Orcutt has been practicing law in North Carolina for more than 30 years, is a member of the National Association of Consumer Bankruptcy Attorneys and a respected member of the local legal community. We invite you to call our office and come in for a free consultation about your debt dilemma. We can help you sort out your tax situation – whatever it is – and clear the way for you to file bankruptcy and be on the way to a financial fresh start. Contact us today!

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