10 Sep IRS Compliance Requirements and the Bankruptcy Code
This blog is my personal tax research tool. Pursuant to the rules of professional conduct set forth in US Treasury Circular 230 nothing contained in this blog was intended to be used by any taxpayer for the purpose of avoiding penalties that may be imposed by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
For bankruptcy cases filed after October 16, 2005, the Bankruptcy Code provides that if the debtor does not file a tax return due after the commencement of the bankruptcy case, or obtain an extension, 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. So yes they can indeed mess with you but realistically all I have to write on this is that one only think about the fact that the IRS budget has only certain limits.
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. Which means in English that all federal tax returns must be filed with the IRS before the date first set for the first meeting of creditors. You don’t need a $400/hour lawyer to tell you this however that lawyer may be bright enough to know that 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. In other words if you are this deep in – don’t let any of this BULLSHIT about definitive deadlines force you to make STUPID decisions becasue extensions are granted ALL THE TIME. However 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. In otherwords – don’t push it too hard.
Trustees may require the debtor to submit copies or transcripts of the debtor’s returns as proof of filing. IRS transcripts are normally mailed within 10 to 15 days of receipt of the request by the IRS. Or they can be obtained electronically through IRS E-Services if your designated representative has an E-Service Account at the IRS. A transcript contains most of the information on the debtor’s filed return, but it is not a copy of the return.
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 or 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. All I have to write about that is to give the Trustee a realistic deliverable date and STICK TO IT…
The filing of a Chapter 12 or 13 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 also known as Adjustment of Debts of a Family Farmer or Fisherman with Regular Annual Income or in the case of Chapter 13 customarily referred to as Adjustment of Debts of an Individual with Regular Income. 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.
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.
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 assuming the estate meets the return filing requirements.
This is a nuance that can instantly inflict narcolepsy but is hugely important, 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. In ENGLISH this means that two separate tax returns must be filed… presuming they separately meet the filing requirements.
The debtor’s income tax returns for the year the bankruptcy case begins and for earlier years are, upon written request, open to inspection by or disclosure to the trustee.
If the bankruptcy case was not voluntary … you were forced into it as a last resort, disclosure cannot be made before the bankruptcy court has entered an order for relief, unless the court rules that the disclosure is needed for determining whether relief should be ordered.
The bankruptcy estate’s tax returns are also open, upon written request, to inspection by or disclosure to the individual debtor. Here are a couple of lessons that I’ve learned:
1. Disclosure of the estate’s return to the debtor may be necessary to enable the debtor to determine the amount and nature of the tax attributes, if any, that the debtor must assume when the bankruptcy estate terminates… and some people can be real pricks about this.
2. A separate taxable estate is not created when a partnership or corporation files a bankruptcy petition. The court appointed trustee is, however, responsible for filing the regular income tax returns on Form 1065 or Form 1120, not the Enrolled Agent, unless of course the Enrolled Agent is indeed the COURT APPOINTED TRUSTEE.
3. AGAIN – the filing requirements for a partnership in bankruptcy proceedings do not change other than the filing of required returns becomes the responsibility of an appointed trustee, a receiver, or a debtor-in-possession rather than a general partner.
4. A partnership’s debt that is canceled because of bankruptcy is not included in the partnership’s income. It may or may not be included in the individual partners’ income.
5. For cases filed after October 16, 2005, unless the return is fraudulent or contains a material misrepresentation, the estate, trustee, debtor, and any successor to the debtor are discharged from liability for the tax upon payment of the tax:
- As determined by the IRS,
- As determined by the bankruptcy court, after the completion of the IRS examination,
The filing of a bankruptcy petition automatically results in a stay against the commencement or continuation of certain Tax Court proceedings concerning the debtor.
Suspension of time for filing. In any bankruptcy case, the 90-day period for filing a Tax Court petition, after the issuance of the statutory notice of deficiency, is suspended for the time the debtor is prevented from filing the petition because of the bankruptcy case, and for an additional 60 days thereafter. This means that if the statutory notice was issued before the bankruptcy petition was filed, and the 90-day period had not expired, the running of the 90-day period will be suspended while the stay prevents the commencement of the Tax Court case. The 90-day period will begin to run again 60 days after the stay against filing the petition ends. The suspension exists if any part of the 90-day period remained at the date the bankruptcy petition was filed. The 90-day period for filing a Tax Court petition after issuance of a Notice of Determination in an innocent spouse case, however, is not suspended by the filing of a bankruptcy petition. Thus, if the IRS issues a final notice of determination denying the debtor’s request for innocent spouse relief during the bankruptcy case, the debtor is prohibited from petitioning the Tax Court while the automatic stay is in effect. However, the 90-day period for petitioning the Tax Court is not suspended. The debtor must ask the bankruptcy court to lift the automatic stay before petitioning the Tax Court.