Bankruptcy Code Tax Compliance Requirements
Tax Returns Due After the Bankruptcy Filing
For all bankruptcy cases filed after October 16, 2005, the Bankruptcy
Code provides that if the debtor does not file a tax return that becomes
due after the commencement of the bankruptcy case, or obtain an extension
for filing the return before the due date, the taxing authority may
request that the court either dismiss the case or convert the case to
a case under another chapter of the Bankruptcy Code. If the debtor does
not file the required return or obtain an extension within 90 days after
the request is made, the bankruptcy court must dismiss or convert the
case.
Tax Returns for Tax Periods Ending Before the Petition Date in Chapter
13 Cases
For bankruptcy cases filed after October 16, 2005, the Bankruptcy Code
requires chapter 13 debtors to file all required tax returns for tax
periods ending within 4 years of the debtor's bankruptcy filing. All
such federal tax returns must be filed with the IRS before the date
first set for the first meeting of creditors. The debtor may request
the trustee to hold the meeting open for an additional 120 days to enable
the debtor to file the returns (or until the day the returns are due
under an automatic IRS extension, if later). After notice and hearing,
the bankruptcy court may extend the period for another 30 days. Failure
to timely file the returns can prevent confirmation of a chapter 13
plan and result in either dismissal of the chapter 13 case or conversion
of the case to a chapter 7 case.
Trustees may require the debtor to submit copies or transcripts of the
debtor's returns as proof of filing. The debtor can request free transcripts
of the debtor's income tax returns by filing Form 4506-T with the IRS
or by placing a request on the IRS's free Automated Delivery Service
(ADS), available by calling 1-800-829-1040. If requested through ADS,
the transcript will be mailed to the debtor's most current address according
to the IRS's records. Transcripts requested using Form 4506-T may be
mailed to any address, including to the attention of the trustee in
the debtor's bankruptcy case. Transcripts are normally mailed within
10 to 15 days of receipt of the request by the IRS. A transcript contains
most of the information on the debtor's filed return, but it is not
a copy of the return. To request a copy of the debtor's filed return,
file Form 4506. It may take up to 60 days for the IRS to provide the
copies after receipt of the debtor's request, and there is a fee of
$57.00 per tax return for copies of the returns.
Tax Returns and Payment of Taxes in Chapter 11 Cases
For bankruptcy cases filed after October 16, 2005, the Bankruptcy Code
provides that a chapter 11 debtor's failure to timely file tax returns
and pay taxes owed after the date of the order for relief (the bankruptcy
petition date in voluntary cases) is cause for dismissal of the chapter
11 case, conversion to a chapter 7 case, or appointment of a chapter
11 trustee.
Individuals in Chapter 12 or 13
The filing of a bankruptcy petition creates the bankruptcy estate. The
bankruptcy estate consists of property that belongs to the debtor as
of the filing date. The bankruptcy estate property is used to pay the
debtor's creditors. The bankruptcy estate is not treated as a separate
entity for tax purposes when an individual files a petition under chapter
12 (Adjustment of Debts of a Family Farmer or Fisherman with Regular
Annual Income) or 13 (Adjustment of Debts of an Individual with Regular
Income) of the Bankruptcy Code. The individual should continue to file
the same federal income tax returns that were filed prior to the bankruptcy
petition. Chapter 13 reorganizations are not available to corporations
or partnerships and are only available to individuals.
On the debtor's return, report all income received during the entire
year and deduct all allowable expenses. Do not include in income any
debts canceled because of the debtor's bankruptcy. To the extent the
debtor has any losses, credits, or basis in property that were reduced
because of canceled debt, these reductions must be included on the debtor's
return. See Debt Cancellation, later.
For information about determining the tax due and paying tax, see Tax
Determination and Payment, later.
Interest on trust accounts in chapter 13 proceedings. If the debtor
is an individual debtor under chapter 13, do not include interest earned
on amounts held by the trustee in trust accounts prior to distribution
to the debtor's creditors as income on the debtor's return. This interest
is not available either to the debtor or the debtor's creditors. It
is available only to the trustee, and is not taxable to the trustee
as individual income.
Individuals in Chapter 7 or 11
If the debtor is an individual who files for bankruptcy under chapter
7 or 11, the bankruptcy estate is treated as a new taxable entity, separate
from the individual taxpayer.
The estate in a chapter 7 case is represented by a trustee. The trustee
is appointed under the Bankruptcy Code to administer the estate and
liquidate any nonexempt assets of the estate. In chapter 11, the debtor
often remains in control of the assets as a "debtor-in-possession"
and acts as the bankruptcy trustee. See Taxes and the Bankruptcy Estate,
later.
If the debtor filed a chapter 7 or 11 case, the debtor must file a Form
1040 for the tax year involved. The bankruptcy trustee files a Form
1041 for the bankruptcy estate. If the debtor is in chapter 11 bankruptcy
and remain as the debtor-in-possession, the debtor must file both a
Form 1040 and the Form 1041 for the bankruptcy estate (if the estate
meets the return filing requirements).
If a husband and wife file a joint bankruptcy petition and their bankruptcy
estates are jointly administered, their estates must be treated as two
separate entities for tax purposes. Two separate tax returns must be
filed (if they separately meet the filing requirements).
Election To End Tax Year
If the debtor is an individual debtor in a chapter 7 or 11 case, the
debtor may be able to elect to close the debtor's tax year for the year
in which the bankruptcy petition is filed, as of the day before the
date on which the bankruptcy case commences. If the debtor makes the
election, the debtor's tax year is divided into 2 short tax years of
less than 12 months each. The first year ends on the day before the
commencement date and the second year begins on the commencement date.
If the election is made, the debtor federal income tax liability for
the first short tax year becomes an allowable claim against the bankruptcy
estate as a claim arising before the bankruptcy filing. The tax liability
for the first short tax year, not subject to discharge under the Bankruptcy
Code, can be collected from the estate.
If the debtor does not make an election to end the tax year, the commencement
of the bankruptcy case does not affect the debtor's tax year. Also,
no part of the debtor's income tax liability for the year in which the
bankruptcy case commences can be collected from the bankruptcy estate.
The debtor cannot make a short-year election if the debtor has no assets
in the bankruptcy estate other than exempt property.
Making the election. The debtor can elect to end the debtor's tax year
by filing a return on Form 1040 for the first short tax year. The return
must be filed on or before the 15th day of the fourth full month after
the end of that first tax year.
Example.
Jane Doe, an individual calendar year taxpayer, filed a bankruptcy petition
under chapter 7 or 11 on May 8, 2007. If Jane elected to close her tax
year at the commencement of her case, Jane's first short year for 2007
ran from January 1 through May 7, 2007, and closed on May 7, 2007. Jane's
second short year ran from May 8, 2007, through December 31, 2007. To
have a timely filed election for the first short year, Jane must file
Form 1040 (or an extension) for the period January 1 through May 7 by
September 15.
To avoid delays in processing the return, write "Section 1398 Election"
at the top of the return. The debtor may also make the election by attaching
a statement to Form 4868. The statement must say that the debtor chooses
under IRC section 1398(d)(2) to close the debtor's tax year on the day
before the filing of the bankruptcy case. The debtor must file Form
4868 by the due date of the return for the first short tax year. If
the debtor's spouse decides to also close his or her tax year, see Election
by debtor's spouse, next.
Election by debtor's spouse. If the debtor is married, the debtor's
spouse may join in the election to end the tax year. If the debtor and
spouse make a joint election, the debtor must file a joint return for
the first short tax year. The debtor must make these choices by the
due date for filing the return for the first short tax year. Once the
choice is made, it cannot be revoked for the first year. However, the
choice does not mean the debtor and the spouse must file a joint return
for the second short tax year.
Later bankruptcy of spouse. If the debtor's spouse files for bankruptcy
later in the same year, he or she may also choose to end his or her
tax year, regardless of whether he or she joined in the choice to end
the debtor's tax year. Because each of them has a separate bankruptcy,
one or both of them may have 3 short tax years in the same calendar
year. If the debtor's spouse joined in the debtor's choice, or if the
debtor had not made the choice to end the tax year, the debtor can join
in the spouse's choice. But if the debtor made an election and the spouse
did not join in the election, the debtor cannot join in the spouse's
later election. This is because the debtor and the spouse have different
tax years. The debtor does not have a tax year ending the day before
the spouse's filing for bankruptcy, and the debtor cannot file a joint
return for a year ending on the day before the spouse's filing of bankruptcy.
Example 1.
Paul and Mary Harris are calendar-year taxpayers. Paul's voluntary chapter
7 bankruptcy case begins on March 4.
If Paul does not make an election, his tax year does not end on March
3. If he makes an election, Paul's first tax year is January 1-March
3, and his second tax year begins on March 4. Mary could join in Paul's
election as long as they file a joint return for the tax year January
1-March 3. They must make the election by July 15, the due date for
filing the joint return.
Example 2.
Fred and Ethel Barnes are calendar-year taxpayers. Fred's voluntary
chapter 7 bankruptcy case begins on May 6, and Ethel's bankruptcy case
begins on November 1 of the same year.
Ethel could choose to end her tax year on October 31. If Fred did not
elect to end his tax year on May 5, or if he elected to do so but Ethel
had not joined in his election, Ethel would have 2 tax years in the
same calendar year if she decided to close her tax year. Her first tax
year is January 1-October 31, and her second year is November 1-December
31.
If Fred did not end his tax year as of May 5, he could join in Ethel's
choice to close her tax year on October 31, but only if they file a
joint return for the tax year January 1-October 31.
If Fred elected to end his tax year on May 5, but Ethel did not join
in Fred's choice, Fred could not join in Ethel's choice to end her tax
year on October 31, because they could not file a joint return for that
short year. They could not file a joint return because their tax years
preceding October 31 were not the same.
Example 3.
Jack and Karen Thomas are calendar-year taxpayers. Karen's voluntary
chapter 7 bankruptcy case began on April 10, and Jack's voluntary chapter
7 bankruptcy case began on October 3 of the same year. Karen chose to
close her tax year on April 9 and Jack joins in Karen's choice.
Under these facts, Jack would have 3 tax years for the same calendar
year if he makes the election relating to his own bankruptcy case. The
first tax year would be January 1-April 9; the second, April 10-October
2; and the third, October 3-December 31.
Karen may join in Jack's election if they file a joint return for the
second short tax year (April 10-October 2). If Karen does join in, she
would have the same 3 short tax years as Jack. Also, if Karen joins
in Jack's election, they may file a joint return for the third tax year
(October 3-December 31), but they are not required to do so.
Annualizing taxable income. If the debtor chooses to close the tax year,
the debtor must annualize the taxable income for each short tax year
the same way it is done for a change in an annual accounting period.
See Short Tax