Chapter 7 and 11 Bankruptcy

• The IRS considers the bankruptcy estate for an individual debtor in Chapter 7 or 11 bankruptcy as a separate taxable entity. The debtor must file an IRS Form 1040 for the bankruptcy year but does not include any assets or income generated through the bankruptcy estate on the tax return. A debtor cannot claim any deductions on associated assets included in the bankruptcy estate. In Chapter 7 bankruptcy, the trustee in possession of the debtor's non-exempt assets must file an IRS Form 1041. In Chapter 11 bankruptcy, a debtor remaining in possession of assets through a court-approved repayment plan must file both IRS Form 1040 and 1041 for federal tax purposes.
  
  

Chapter 12 or 13 Bankruptcy

• The IRS does not consider the bankruptcy estate in Chapter 12 or 13 bankruptcy as a separate taxable entity. This is because in Chapter 12 and 13 the debtor remains in possession of property and no trustee liquidation occurs. The debtor should continue to file the same tax return as in previous years and deduct any allowable expenses. The debtor does not need to include any debts cancelled by the bankruptcy process. The tax return must include any financial losses or property losses suffered as a result of a cancelled debt through the Chapter 12 or 13 bankruptcy.
  
  

Election to End Tax Year

• In a Chapter 7 or 11 bankruptcy case, a debtor may elect to close her tax year of the day before the bankruptcy case begins. The debtor's tax year is then divided into two separate taxable years each being less than 12 months long. The first year ends before the commencing of bankruptcy proceedings while the second year begins on the day bankruptcy proceedings begin. This allows the debtor to file taxes before the bankruptcy is in existence and claim deductions and credits that may not be valid once the court creates the bankruptcy estate.
  
  

Failure to Pay Taxes

• Filing timely federal tax returns is a vital component of any bankruptcy case. As of October 2005, a debtor filing for Chapter 13 bankruptcy must submit all federal tax returns for the previous four years or risk losing his bankruptcy case or having it converted to a Chapter 7. A debtor filing for Chapter 11 or 7 bankruptcy must continue to file timely tax returns or risk the dismissal or the bankruptcy case. The court may decide to convert a Chapter 11 case to a Chapter 7. Dismissal is the only option for a Chapter 7 bankruptcy.