01 Mar 2016

Unearth a Treasure Trove in Your Estate Refunds this Tax Season

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You don’t need leprechauns or a rainbow to shine the way to your treasure trove this tax season. We’ve put together some handy tips along with a refresher of Chapter 7 requirements to transform your tax refunds into gold and make this tax season much greener for you!

Check out a brief refresher of tax considerations in the administration of estate assets provided by the Chapter 7 Handbook below. For each item on our list, we’ve included keywords that you can use to search HelpLink, our online help file, where you can find detailed instructions about how to use the features in CaseLink to help you prepare tax returns for your estates to pristine perfection.

Deadlines

Taxes must be properly and timely remitted to the IRS in accordance with these dates:

  • January 31: Employment forms such as 940, 1099 and W2 to tax filer
  • February 29: IRS copy of 1099/1096, SSA copy of W2
  • March 15: Corporate tax deadline (1120, 1120S)
  • March 31: Electronic copy of 1099/1096 & W2 to IRS
  • April 15: Partnership (1065) tax deadline
  • April 18: Individual (1040) tax deadline
  • April 30: 941 (also due on the last day of the month following each quarter end)

Income Taxes

According to the Chapter 7 Handbook, the trustee must file income tax returns for their entrusted bankruptcy estates in accordance with the following guidelines:

Individual vs. Partnership/Corporation Debtors

Per federal, state and local tax laws, individual Chapter 7 debtors and the bankruptcy estate are treated as separate taxable entities, which means the individual debtor must file their own personal tax returns, and the trustee must obtain a separate tax ID number for the estate.

By contrast, a partnership or corporation is not a separate taxable entity from the bankruptcy estate, which means the trustee must use the tax ID number of the corporation or partnership for the estate.

Keywords to search in HelpLink: Tax Refund Calculator, Tax IDs, Tax Identification Numbers (TINs)

Prior Year Returns

When preparing tax returns, the trustee will often need to review the debtor’s prior year returns. If a debtor is uncooperative or you are otherwise unable to gain access to the debtor’s prior year returns, you can request copies or a transcript from the IRS using Forms 4506 or 4506-T.

Check out how to keep track of debtors’ prior tax returns in CaseLink Office and CaseLink Web.

Employment Taxes and Other Tax Forms

According to the Chapter 7 Handbook, if the debtor is an employer, the trustee must withhold and pay to the government all applicable federal and state income, social security, and Medicare taxes from any wage claims paid by the estate, all of which must be paid through the Electronic Federal Tax Payment System (EFTPS). In addition, the trustee must file the following forms:

  • Form 941 (Employer’s Quarterly Federal Tax Return) for withheld federal income and FICA taxes.
  • Form 940 (Employer’s Annual Federal Unemployment Tax Return) for unemployment taxes.
  • State income tax withholding forms for the state in which the employee worked.
  • State unemployment tax forms for the state in which the employee worked.
  • Local tax forms as appropriate.

The trustee may also have to file information returns (Form 1099 series) in these circumstances:

  • Form 1099-INT when the trustee makes certain interest payments.
  • Form 1099-MISC when:
    • Fees of more than $600 are paid to accountants and other professionals for work assisting in the administration of the estate.
    • Fees of any amount are paid to an attorney.

Read our full article on 1099s from January 2016.

Keywords to search in HelpLink: 1099 Forms, Wage Claim Taxes, Tax Refund Calculator

Employee W-2 Forms

The trustee must file with the IRS and submit to the employees W-2 forms for wages paid by the estate.

Keywords to search in HelpLink: Wage Claim Taxes

Sales and Abandonments

According to the Chapter 7 Handbook, when a property of the estate is sold, the estate recognizes a taxable gain or loss. Because of the tax implications involved in asset sales, it is important to weigh the benefit to the estate when these costs are known. Read our article on when sales of real property may require you to file a tax return from February 2016. Be sure to consult with an accounting professional to determine whether sufficient proceeds will be recovered in order to pay the tax liabilities, or whether the property should be abandoned.

Keywords to search in HelpLink: Asset Documents, Asset Insurance, Managing Asset Values

Property Taxes

Secured or unsecured property taxes for the estate are allowable as administrative expenses. In addition:

  • Ad valorem property taxes may be recovered from property securing claims, pursuant to section 506(c).
  • In a business case, the trustee is generally required to pay property taxes on or before their due dates, unless the taxes are secured by a lien against the property that is abandoned by the trustee within a reasonable period of time after the lien attaches.

Keywords to search in HelpLink: Expenses, Asset Documents

Prompt Audit Determination – 505(b)

Once a final estate tax return has been filed, it is beneficial to utilize section 505(b) of the Bankruptcy Code and request a “Prompt Audit Determination” from the IRS. The trustee submits two complete copies of the filed tax returns to the Centralized Insolvency Operation, a unit of the IRS, along with a letter requesting a determination of tax liability. The agency then has 60 days to determine whether the tax return will be selected for audit. If the tax return is selected, the examination must be completed within 180 days.

In most cases, a letter will be returned stating that there is no tax liability. But even if no letter is received, once the time limits expire, the trustee is released from any future liability, absent fraud or material misrepresentation in the return.

Most state taxing authorities have a similar procedure for requesting a prompt audit determination. Consult with your tax professional for addresses and procedures.

HelpLink-Home-ScreenTo access HelpLink, the online help file for CaseLink users, you must first log into your BMS software.

  • CaseLink Office users: select “Help” from the top navigation, then “CaseLink
  • CaseLink Web users: select the question mark icon on the top right corner of the top navigation.
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