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Bankruptcy's impact on a Tennessean's taxes

Tax season is upon us. Some have already filed, others are procrastinating. But either way, each of us needs to deal with it at some point. Along the way, we each face unique wrinkles. One such wrinkle is how should Tennesseans handle their bankruptcy with the IRS. To learn more about how to do so, keep reading.

Let's start with a little background: when a person files for Chapter 13 bankruptcy, they must meet certain criteria - including that they have filed all required tax returns over the previous four reporting periods. Upon filing, the person will come up with a payment plan with their creditors. Once they have successfully completed the plan, most if not all of the remaining debt is discharged in bankruptcy. One source of debt that may be eligible for discharge is tax debt.

Keeping that background in mind, the first thing to know is that if a person's debt has to do with overdue federal tax debts, then the person may have to change their withholding amount. They may also have to bump up their estimated tax payments.

The next thing to know is that even though a person has filed for bankruptcy, they may still qualify for a tax refund. "May" is the operative word because the IRS will generally take a careful look at a person's returns to figure out whether the person owes any tax debts. Because of that, filers should expect that their return will take longer to reach them and might not at all if the person owes non-dischargeable tax debts.

That said, some tax debts are dischargeable. If a filer has successfully discharged them in bankruptcy, then the IRS should not divert a tax refund to pay down already-forgiven debt. But deciding whether a tax debt is dischargeable or not can be tricky. Because the question is so fact-dependent, Tennesseans may benefit from discussing those facts with an experienced bankruptcy attorney.

Source: irs.gov, "Chapter 13 Bankruptcy - Voluntary Reorganization of Debt for Individuals," Accessed Feb. 15, 2016

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Mark T. Young & Associates
2895 Northpoint Blvd.
Hixson, TN 37343

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