Would the IRS be happy if you filed for bankruptcy in December?

calendar-pages-flying-away-11622050As the tail end of the year rolls around, perennial questions spook bankruptcy lawyers about the advisability of filing a year-end bankruptcy case for a client who owes taxes to the IRS or Mass. DOR, or both.

Northern California consumer bankruptcy maven Cathy Moran has posted some the essentials on her site, which gives inquiring minds the basic grasp of the issues they need to begin an analysis.

Moran outlines the fundamental rule at stake, which is well-hidden from most normal taxpayers, and probably most of the experts and gurus as well:

Taxes for the year technically become due on January 1st following the conclusion of the year.

So your 2013 taxes are not due in December of 2013. But they will become due on New Year’s Day of 2014, despite the fact that your return isn’t due until April 15th, and that there is no practical way for you to file a return until somewhere around the start of February.

So what does this mean if you owe a lot of back taxes and have been thinking about filing a bankruptcy case?

As attorney Moran points out, if your taxes are the kind that can be discharged in bankruptcy, filing NOW in December could help you get your refund next April, as it would be illegal for IRS or Mass. DOR to set-off you old debts against new ones after the BK case is filed. Taxpayers in this situation want to file now, so that the 2013 debt and refund is not an “old” one as well when it “comes due” at New Years.

On the other hand, debtors who know (or suspect) that they are going to OWE a whopping amount on their 2013 taxes, would be well advised to wait until after the start of the year to file a bankruptcy.

This is because by filing in December they would forfeit the ability to include the 2013 tax bill in a Chapter 13 plan, which could be paid off over five years with no additional interest accruing.

So be careful if you are behind to the tax man and think bankruptcy could be a way out: in these cases, timing is literally everything!


By Doug Beaton

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