The Importance of Filing Tax Returns for Bankruptcies

Now that the year is coming to an end, many people are looking towards the new year and all that it entails. One of the important parts of any new year is filing one’s taxes. This is great for some, who can expect a return on their taxes from the government, but for others it can be a pain and something they would rather put off. Either way, it is important to file one’s taxes.

Filing one’s taxes is especially important for those who are considering whether to file for bankruptcy. The bankruptcy code is a wonderful federal law that allows people to discharge most of their debts and get a fresh start in life. Not all debts are dischargeable, however.

Non-Dischargeable Debts in Bankruptcy

Not all debts are the same. Some are related to consumer spending, buying a home, medical expenses, and more. Most of these kinds of debts are dischargeable under the U.S. Bankruptcy Code, but there are some notable exceptions that you should be aware of before filing for bankruptcy.

One type of debt that is difficult to get rid of in bankruptcy are federally-backed student loans. In the 1970s, Congress moved to protect note holders of student debt and made it almost impossible to discharge a federally-backed student loan. This was mainly to prevent people from getting an expensive degree, declaring bankruptcy, and then starting over with a high salary and no debt.

Another kind of debt that cannot be discharged in a bankruptcy is related to taxes. Many tax debts are subject to bankruptcy and can be wiped clean with a declaration of bankruptcy. This is not true of tax debts that are a result of a late or unfiled tax return, in most cases. This is an exception built into the Bankruptcy Code and is meant to force people to at least file a tax return every year.

9th Circuit Defines When a Debt is Not Dischargeable

This issue was recently presented to the 9th Circuit Court of Appeals when a man tried to discharge his tax debt of more than $70,000. The case went back to 2001 when the man failed to file for a tax return that year. As a result, the IRS filed a substitute return for him, and assessed the penalties for failing to file for a tax return. Seven years later the man filed an amended return on that year, and then sought to have the debt discharged in bankruptcy.

The court did not accept the man’s late return as valid and would not allow the debt to be discharged. The court did distinguish and say that in some cases a late return would be acceptable, but in most cases, it would not be. What resulted is a debt for this man that he will pay to the IRS until it is paid all the way off. This is why it so important to file for taxes every year, even when a big bill will be coming due as a result. It seems that the IRS will always track down and get the money they are owed.

Your California Bankruptcy Team

If you are struggling with debts and considering filing for bankruptcy, contact us. At The Bankruptcy Law Center of team of qualified bankruptcy professionals will guide you through your options, and help you make the best choices for your situation. We look forward to hearing from you soon.

(image courtesy of Brandon Day)