Before you file Chapter 7 bankruptcy, it may be wise to accomplish some important things as to your taxes first. It is very important to file all of your tax returns. It is also important to wait for the right timing.
You should usually go back and file all of your tax returns before your file for Chapter 7 bankruptcy. This is very important. You cannot discharge (get rid of) any income tax debt unless you go back and file all your tax returns.
Usually, you can get rid of income tax debt that is more than 3-4 years old. However, you must have filed all your tax returns in order or this to happen. You will need to use an accountant to get a full 1099/W2 report from the IRS for each of your missed years. You may also need to find records or estimate your expenses for every year you had 1099 income. Remember, it is not enough for the IRS to file or estimate your taxes for you. You or an accountant must go back and personally file them.
Filing all of your old tax returns is not as difficult as most people think. It is easy to acquire old-year tax forms online. It is also easy to get a W2/1099 report from the IRS from the tax years you were unable to file. This W2/1099 record contains all of the W2/1099 data that was turned into the IRS for each previous tax year. You will then know for sure what your income was for those missed years. You will also be sure that your records would then perfectly match up with the IRS’s records.
It is not enough to simply go back and file your returns. You will also have to wait two years after filing your federal and state returns. If you file bankruptcy before the two-year mark of the IRS processing your returns, then you will likely lose out on having any tax debt discharged in your bankruptcy.
If you have a large debt load that goes beyond income taxes, you may just need to file before you wait the 2 year period. However, it still may be wise to go back and file all of your income tax returns. After you have all your non-tax debt eliminated in bankruptcy, you may be able to go to an accountant to get a discount on your tax debt. These discount agreements are usually called an “offer in compromise.” You then may be able to pay a fraction of the debt over time (or in a lump sum) to satisfy your old tax debt obligations.