06 Feb 2018

Top 5 Tax Tips for Bankruptcy Estates

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Contributed by Cheryl Wesler, CPA, Trustee Resource Group

The content provided in this article by a third-party is for informational purposes only and is not intended as BMS-provided tax advice.

When preparing bankruptcy estate tax returns, it is important to ensure all requirements are met to avoid costly penalties.

Review these helpful tips to stay compliant when filing:

1. Jointly administered bankruptcy estates require separate Tax Identification Numbers (TINs).

Bankruptcy estates with joint debtors require separate tax returns and Tax Identification Numbers (TINs). To procure a new TIN for a bankruptcy estate, complete and mail Form SS-4 to the IRS.

When filing these returns, trustees should advise issuers of tax documents to include the estate TIN instead of the debtor’s social security number (SSN). In addition, make sure all forms reflect the correct TIN before filing.

2. Bankruptcy estate filing thresholds change each year. The 2017 filing threshold is $10,400.

Bankruptcy estates with a gross income exceeding the filing threshold require a tax return. The threshold is equal to the sum of the personal exemption plus the standard deduction for a married individual filing separately (MFS).

The filing threshold changes each year—for the 2017 year it is $10,400.

*Note: Under the new tax law, personal deductions have been suspended until 2026—so the filing threshold for 2018 will be $12,000 or the standard deduction for an MFS taxpayer. Any other 2018 tax guidance will need further clarification from the IRS.

3. Always file interim bankruptcy tax returns on time.

Avoid penalties and incurred interest to bankruptcy estates by always filing tax returns on time. This is especially crucial for partnerships, since the penalty for filing late is $200 per partner, per month—regardless if there is a tax liability. The IRS does accept penalty-abatement requests, although bankruptcy is generally not accepted as reasonable cause.

4. For prompt determination of tax liabilities under §505(b), a tax return must be filed.

Under §505(b) of the Bankruptcy Code, the estate is allowed prompt determination of liabilities from the IRS only after a tax return has been filed. This determination can be an added assurance for the estate even if there is zero liability.

5. If receiving stock sale proceeds, the estate handles the tax in certain circumstances.

If the estate has received or is receiving proceeds from a taxable sale or exchange of stocks, it handles the tax if:

  • The estate cashed the stocks (not the debtor). If the debtor cashed the stocks under his or her SSN, the 1099 will be issued under the debtor’s SSN. 
  • The estate’s TIN was provided in the sale (not the debtor’s SSN).
  • The check was made out to the bankruptcy estate—not the debtor.

About Trustee Resource Group

Trustee Resource Group (TRG) is a bankruptcy firm comprised of three distinct departments, each focused on a specific area of bankruptcy: insurance, tax and accounting. These specialized departments work closely together to provide more efficient, comprehensive solutions to TRG clients, including bankruptcy trustees, assistants, attorneys and CPAs. TRG is led by Thomas Tibble, CPA, a Chapter 7 Panel Trustee in the Western District of Michigan.

About Cheryl Wesler

Cheryl Wesler is a CPA with Trustee Resource Group (TRG) and partner with the regional tax firm of Tibble & Wesler.  TRG is a bankruptcy firm that specializes in insurance, tax, and accounting for the insolvency industry.

Cheryl has more than twenty years of accounting and tax experience, and more than eight years of bankruptcy experience.  She routinely assists and guides insolvency professionals nationwide in determining bankruptcy estate tax liabilities for both federal and state matters.

Most recently, Ms. Wesler was the accountant employed to advise and complete the bankruptcy estate tax returns for the Supreme Court case of Clark v. Rameker.  She is a member of Turnaround Management Assocaiton (TMA), International Women’s Insolvency & Restructuring Confederation (IWIRC), National Association of Bankruptcy Trustees (NABT), American Institute of CPAs (AICPA), Michigan Association of CPAs (MICPA), and the Michigan Women’s Tax Association (MWTA).