If you have filed bankruptcy, you know that it is a tough decision, and it can be complex. However, what many people do not think about before filing bankruptcy is how it is going to affect them during tax season. Therefore, today we are covering the subject.
Bankruptcy and Taxes
Usually, when taxpayers file for bankruptcy their taxes are not affected. However, the cancellation of debt generally is taxable. This means that the debts that you have discharged during bankruptcy are excluded from your income based on IRS rules. Therefore, if you receive Form 1099 C you should include the information from that form on your tax returns.
IRS Debts and Bankruptcy
If you have debts owed to the IRS, filing bankruptcy may or may not prohibit them from being able to take the money. It depends on the type of tax debts you have. Usually, if the debt is from years ago it will be discharged. However, if the debt occurred because of fraud or tax evasion you are still responsible for paying the debt. There are some exceptions to this information so make sure that when considering bankruptcy that you voice your concerns to your attorney.
If you’d like to read up on bankruptcy this tax season, be sure to check out our “Rejection of Offer in Compromise: Bankruptcy” in our Seattle CPA Offer in Compromise Guide.
Final Thoughts
Keep in mind that there are two types of bankruptcies that you can file. The Chapter that you file can influence how your taxes are affected after you have filed for bankruptcy. This is why it is important that you speak with an attorney before you make the decision that filing for bankruptcy is in your best interest.