When it comes to managing personal finances, it can be tricky to know how to proceed. While many people start focusing all of their energy on taking care of the things they need at the moment, the truth of the matter is that there are a lot of things you can do to disrupt your finances that may be easy to ignore at first. For starters, it is crucial to move forward and identify tax issues, even if you haven't focused on them quite yet. Check out these short posts to learn more about how you could be faced with tax problems, and how to resolve the situation for the long run.
Bankruptcy affects many aspects of your financial life, including your income taxes. This means that working with your tax preparer as a team before and during bankruptcy is a must. Here are a few reasons to talk to your tax preparer about any bankruptcy plans.
1. You Must File Old Returns
If you aren't up to date on all your current and prior year taxes, now is the time to get current. Bankruptcy rules require that the debtor file all returns due for the past several years. This may or may not include the current year depending on the timing of your filing. This is partially because the bankruptcy must capture all legal debtors — including the tax agencies — who may have a claim to assets being liquidated.
2. You May Want a Second Opinion
Even if you have filed your income taxes, you may want a professional to go over them again. This is especially important if you did your taxes yourself, if your spouse handles the tax returns every year, or if you have unusual income (such as a business). A second opinion ensures that you won't face surprises when you submit these returns to the court.
3. Taxes and Penalties Are Dischargeable
The good news is that in filing your old taxes, you benefit. Income taxes are subject to discharge if they qualify under the bankruptcy code rules. In addition, if an old tax debt is discharged, so will any penalty that was incurred if you filed it late. But if you don't include tax debts in your case, you may lose out on any discharge relief for them.
4. Discharge and Cancellation Can Be Complex
Working with a tax professional can help you avoid extra problems and expenses related to canceled debt. Creditors may mishandle discharged debt, for instance, by sending Form 1099-C reporting the canceled debt as taxable income. An unsuspecting debtor may not understand the difference between canceled debt and discharged debt and so could end up misreporting this on their taxes.
5. You May Need to Work With the IRS
Taxpayers must often communicate with the IRS during their bankruptcy. You may need to request old tax information or receive notices regarding the returns you recently filed. Tax liens may survive the bankruptcy discharge. And you may need to notify federal or state tax agencies about the automatic stay against collections. The best way to communicate with any tax agency is with the help of a trained professional tax preparer.
Where to Start
If you plan to file bankruptcy, schedule a consultation with an experienced tax preparation service in your state. They will help you determine what filing steps you should take and learn what you need to know about how your case will affect your taxes — and vice versa. Make an appointment today. For more information, contact a tax preparation consulting service.Share
16 March 2021