Types

• When a taxpayer files bankruptcy, this creates what is known as a bankruptcy estate. The estate is comprised of all the taxpayer’s assets prior to filing bankruptcy and is used to pay the taxpayer’s creditors. For taxpayers who file chapters 12 or 13 bankruptcy, the estate is not treated as a separate entity from taxpayers whereas the estate is treated as a separate for chapter 7 and 11 filers. In Chapter 11 bankruptcies, the debtor often remains in control of the estate while in Chapter 7, the bankruptcy is estate is managed by a trustee. Chapter 13 bankruptcy is not available to corporations or partnerships, only individuals.
  
  

Filing

• For chapters 12 and 13, individuals are expected to file the same tax forms they normally file. Taxpayers in chapters 7 or 11 bankruptcies must file taxes using IRS Form 1040. Since chapters 7 and 11 separate the individuals from the estate, the taxpayer is required to file Form 1040 for themselves and Form 1041 for the bankruptcy estate. For joint filers who file chapter 7 or 11, their estate is treated as two separate entities. Chapters 7 and 11 debtors-in-possession or their trustees are responsible for filing income taxes and paying tax on any income that does not belong to the estate using an Employer Identification Number (EIN). The amount of the estate is determined by the bankruptcy court. There is no separate entity set up when a corporation or partnership files bankruptcy and the trustee of corporate bankruptcy filings is required to file Form 1065.
  
  

Discharge

• You are not responsible for including on your return any debts canceled due to the bankruptcy. If you file for bankruptcy protection, debts that are discharged through a bankruptcy proceeding are not considered taxable income. However, the filer must reduce certain losses and credits by the amount of the canceled debt. Not all tax debts are available to be discharged and these debts include taxes for which no return was filed, tax resulting from fraudulent returns, and taxes you willfully evaded paying.
  
  

Exception

• Corporations that are in the process of a bankruptcy, receivership, or dissolution may request relief from filing income tax returns with the IRS. To qualify, the corporation must have ceased doing business and have no assets or income for the tax year in question.