Individuals filing bankruptcy must provide copies of their past two years of Federal income tax returns and the accompanying W-2s and 1099s. Also, they must have filed all Federal tax returns for the past four years that were due. I am often asked why this is so.
The bankruptcy trustees, in both Chapter 13 bankruptcy and Chapter 7 bankruptcy, want to review your tax returns for several reasons. First, it gives them an idea of how much money has been earned in the household the past several years. When you file a bankruptcy, you submit proof of your income via paystubs and verified statements. The trustee needs this information to determine whether or not you have sufficient funds to repay your creditors. Your tax returns provide further proof..
Tax returns may also show if you were making large amounts of money at some point in the past two years. This will not necessarily prevent you from filing bankruptcy, by any means. However, you may need to explain to the trustee why your income has dropped. It could be for a reason as simple as you lost your job or had a paycut.
The second reason that you must provide copies of your tax returns is that it is required under the Bankruptcy Code. The Bankruptcy Code requires you to have filed all Federal income taxes for the four years previous to the year of the filing of your bankruptcy case. In rare occasions the trustee may ask for older returns, but this is far from normal.
If you are not required to file tax returns, for instance because your only income is for Social Security or you have not worked during the tax year, a verified statement can be provided telling the trustee as much. You do not have to file just for the sake of filing.
The final reason it is important to provide your tax returns is so that your bankruptcy attorney can make sure to exempt any tax refund that you may receive. A potential tax refund is considered an asset and must be protected from your creditors. Early in the tax year, the trustees may hold open your case to see how large your tax refund will be. If your tax returns have been filed, we will know what your likely return will be, and we can protect it from your creditors.
Call us at 412-414-9366 if you have any bankruptcy related questions. We would be happy to set up a free consultation to discuss your situation, whether it involves a tax issue or not!