April 25, 2014

Unfiled Tax Returns and Chapter 13

unknown tax liability and chapter 13 bankruptcyChapter 13 bankruptcy cases filed in the Northern District of Georgia cannot be confirmed by the bankruptcy court judge if the IRS or State of Georgia files documentation reporting unfiled tax returns.  The reason?  If you have unfiled tax returns, your potential tax liability is unknown.  Since Chapter 13 consists of a payment plan that must fit within five years, an unknown liability means that there is no way to calculate whether your proposed plan payment will work.

Further, prior to your Section341 hearing your Chapter 13 trustee will want to see a copy of last year’s tax return to (a) confirm that you have filed it, and (b) to cross check the annual income figure reported on Schedule B of your petition with the income figures shown on your tax return.

As you can see, therefore, your Chapter 13 cannot get past the trustee or the judge if you have unfiled returns.  Currently the IRS reports unfiled tax returns over the past 10+ years, so you should not assume that if your unfiled returns date back many years, you are in the clear.  In fact, the statute of limitations to determine when tax debt may be discharged in bankruptcy as stale does not begin to run until your returns have been filed.

What can you do, however, if you need to file Chapter 13 to stop a foreclosure, repossession or other emergency, and you have unfiled tax returns?

You can still file Chapter 13, but you need to move quickly to get those returns filed as soon as possible.  Tax return preparers can download the forms from previous years and if you do not have your 1099′s or W-2s you can get copies of these documents from the IRS directly.

I know several very capable tax preparers who can produce returns for past years.  You will have to pay a bit more than you would for an on-time return for this service, but if you plan to make your Chapter 13 work you have no choice.

Often I find that the past due tax return preparer may need several weeks to gather and process the tax return.  If I see that the return preparation is in progress, I can file an objection to the IRS or Georgia proof of claim and use that objection as the basis to request a reset of the confirmation hearing.  This will keep your case alive.

However, the Chapter 13 trustees in our district expect that you will make a diligent and timely effort to get your overdue tax returns filed.  If you do owe money, we may have to recalculate your plan payment.  If you are due a refund, that money may go in whole or in part to the trustee.

If you did not earn enough money to require the filing of a return, you can execute an affidavit to that effect or file a return showing your limited income.  Either way, move quickly.

Finally, recognize that the IRS gets automatic notification of every Chapter 13 bankruptcy case filing, so if you have been flying under the radar, your bankruptcy filing will put your case file on an IRS staffer’s desk.

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Jonathan Ginsberg practices consumer bankruptcy law in the Atlanta, Georgia area.

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