How to File Taxes if You've Filed for Bankruptcy

Instances of personal bankruptcy are on the rise, and when tax season approaches, many people who have filed for bankruptcy wonder how to file taxes, or if they even need to file at all. How you prepare your tax return depends on which chapter, e.g., Chapter 7, Chapter 11, etc. Here is a guide to help you acquire the necessary forms and information.

The first step is to order publication 908 from the IRS. Publication 908 contains information for taxpayers who have filed for chapter 7, 11, 12, and 13 bankruptcy within the past year. While most bankruptcy filers will have to pay tax on income less than 3 years old, your tax burden may be reduced in other areas.

Have your taxes prepared by a tax attorney. Bankruptcy is one of the red flags that can trigger an audit, so it is very important to have a tax professional prepare your return whenever you file for bankruptcy. If you are in a low income bracket, you are eligible for free tax help. Call the IRS about free tax programs in your area. If you are confused by tax laws, do not attempt to file taxes yourself, or else you could end up with tax troubles on top of debt.

If you receive a form that says a creditor has canceled your debt, you may have to report the debt cancellation as income in some cases. Bring all such information to the attention of your tax preparer. Although bankruptcy is the most common exception to tax on a canceled debt, it still must be reported to the IRS.

Consult the attorney who handled your bankruptcy case. Some law offices may offer joint tax and bankruptcy services.

If your bankruptcy is due to your inability to pay taxes from prior years, or you also owe back taxes, it is very important to work closely with the IRS to ensure that you do not compound your problems. Technically, at least on paper, you still owe taxes on any income, even if you can't pay it and are in a state of bankruptcy.

© Had2Know 2010

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