Many debtors considering bankruptcy fail to file their taxes which can have huge financial implications as well as a negative impact on any future bankruptcy. Here’s why…when a debtor files a tax return, even if they don’t pay, the clock starts on two very important time periods that impact bankruptcy. The first important time period for taxes in bankruptcy is the three year period in which the IRS is allowed to assess more taxes for that year’s tax return. This can potentially reduce tax debt owed in any future Chapter 13 bankruptcy .
The second important time period for taxes is the 10 year time period where the IRS can pursue collection on a tax debt. That’s right, the IRS cannot try to collect tax debt on a tax return that was filed more than 10 years ago. This also reduces tax debt in any future bankruptcy.
But that’s not all, if you want to discharge taxes in bankruptcy, you can only do so on tax returns that were:
Filed on time
Filed within the granted extension time
Filed two years before you declare bankruptcy
Many debtors find themselves unable to discharge burdensome tax debt in bankruptcy simply because they did not file under the prescribed rules. Don’t let that happen to you. Even if you cannot pay, you must file your taxes, doing so increases your chances of discharging them in bankruptcy.