About Me
“ Craig D. Robins, Esq., has been a practicing Long Island bankruptcy attorney for over twenty-four years ”
Tax and Bankruptcy Issues
Written by Craig D. Robins, Esq.
Bankruptcy Questions I’ve Received About Tax Refunds During “Tax Week”
This is the final post of my of “tax week” series of articles this past week in which I addressed every aspect you’ll need to know about filing bankruptcy and protecting tax refunds, together with info on related issues. Links to all posts in this series are at the bottom of the page.
I’ve gotten some very positive feedback on the tax week. Here are some interesting comments and questions that I’ve received:
QUESTION: I’m about to file a Chapter 7 case; I haven’t filed my tax return yet; and I expect a large tax refund which is not totally exempt. Why don’t I just delay filing my tax return until my bankruptcy case is over?
If a trustee thinks that there may be a substantial tax refund, then he will hold the case open until you file the tax return and provide him with a copy. Thus, delaying the filing will only delay the conclusion for your bankruptcy case.
QUESTION: If I anticipate a large tax refund, why don’t I just submit a tax return that contains incorrect information that shows that I owe lots of tax (meaning that I will not get a refund); and then just amend the return after the bankruptcy case is closed and get the tax refund then?
Well this person certainly thought creatively. Very few people artificially fudge the figures on their tax return to pay more tax then they owe.
However, this approach is probably illegal under the federal tax law, as a taxpayer is obligated to provide correct information on a tax return. In addition, should the trustee learn that a debtor intentionally manipulated the figures on the tax return to “beat the system” and deceive the trustee, the debtor would likely be looking at a proceeding seeking to revoke the debtor’s discharge.
Bottom line: be honest and accurate when filing your tax return, just as you should be accurate and candid when providing info on your bankruptcy petition.
QUESTION: I recently filed a Chapter 7 bankruptcy and the trustee insists on seeing my tax return before closing my case. However, it will take foreever before I can do my tax return. Is there anything I can do to expedite having the trustee close my case.
Unfortunately, the answer is “no.” If the trustee thinks there may be a significant non-exempt tax refund, he will keep the case open until he can review the tax return. Your best bet is to file the return as soon as possible.
Quick Links to All Tax Week Blog Posts About Tax Refunds and Bankruptcy:
Informative Article About Eliminating Taxes in Bankruptcy:
Article About Tax Consequences and Bankruptcy:
Written by Craig D. Robins, Esq.
This post is part of a series of articles that I’ve written this week addressing every aspect you will need to know about filing bankruptcy, protecting tax refunds, and related issues. Links to all posts in this series are at the bottom of the page.
Tax Refunds in Chapter 13 Bankruptcy Cases Filed in New York
Generally, if you file for Chapter 13 bankruptcy in New York, you will be able to keep your tax refund if your Chapter 13 plan provides for a 100% payment to all creditors. If it does not, then you will have to remit any tax refund to the Chapter 13 trustee, who will include it in the distribution to creditors.
If you have a Chapter 13 plan that provides for a payment of less than 100% to unsecured creditors, then you will also have to remit all future tax refunds to the trustee for the period of the plan, which would probably be five years. Here’s why:
A debtor in a Chapter 13 case is required to pay all projected disposable income into the Chapter 13 plan. Tax refunds are considered additional income that the debtor has over-withheld. Thus, when this income comes in, it has to be paid into the Chapter 13 plan.
In those Chapter 13 cases where you have to submit your tax refund to the Chapter 13 trustee, there will be clear and explicit language in the Chapter 13 plan about this, which will also indicate that you are responsible for sending a copy of your tax return to the trustee at the same time that you file it.
TIP: The higher the number of exemptions that you provide to your employer on an IRS W-9 tax form, the less the witholding will be, and the smaller the tax refund. In sub-100% Chapter 13 plans, you will want to have as small a refund as possible, because any refund that you do end up receiving just goes to your creditors, and does not benefit you in any way.
Effect of Receiving Tax Refund Before Filing Bankruptcy: Possible Whammy on the Means Test
Yesterday I wrote about How a Tax Refund Can Mess Up Your Bankruptcy Means Test . Well, the same means test that is used in Chapter 7 cases to determine eligibility to file for Chapter 7 relief, is also used in Chapter 13 cases to determine the minimum amount that you have to pay into the Chapter 13 payment plan.
If you file a Chapter 13 petition in the six-month period after receiving a tax refund, then you must include the tax refund in the means test as income. This is because all income received during the six-month means test period must be listed, and income tax refunds constitute income for this purpsoe.
Even though the income tax refund can be pro-rated to reflect receiving it over a twelve-month period, it will nevertheless increase the amount you will have to pay in the means test. However, if you file your bankruptcy petition more than six full calendar months after receiving the tax refund, you do not have to include the tax refund, based on a strict interpretation of the law.
This means that most people who file for Chapter 13 during the second half of the year who have plans that pay less than 100% can expect to pay less into their Chapter 13 plans each month. This is not exactly a logical result, but it’s the result of a very poorly and ambiguously worded means test statute.
Quick Links to All Tax Week Blog Posts About Tax Refunds and Bankruptcy:
Informative Article About Eliminating Taxes in Bankruptcy:
Article About Tax Consequences and Bankruptcy:
Written by Craig D. Robins, Esq.
This post is part of a series of articles this week addressing every aspect you will need to know about filing bankruptcy, protecting tax refunds and related issues. To see all posts in this series to date, click this link: Tax Refunds and Filing Bankruptcy .
Effect of a Tax Refund on the Means Test
For purposes of the means test, a tax refund that is received during the six-month means test period, must be included as income for purposes of the means test.
Technically, the means test requires that you allocate the full tax year refund into a six-month period, which as the effect of doubling the amount of the refund, which can provide for a very unfair result, and can result in you failing the means test for this reason alone.
Fortunately, it seems to be the accepted practice to pro-rate the refund over a twelve-month period.
However, strictly construing the means test can sometimes help a debtor. If the tax refund is received outside of the six-month means test period, then technically it does not have to be included in the means test at all.
I’ve learned over the years from representing our Long Island bankruptcy clients, that including the tax refund in the means test or not can sometimes make the difference between passing the means test or failing it.
This underscores the importance of getting competent advice from an experienced bankruptcy lawyer before filing for bankruptcy.
Written by Craig D. Robins, Esq.
This post is the fourth in a series of articles that I’ve writtten this week addressing every aspect you will need to know about filing bankruptcy, protecting tax refunds, and related issues. Links to all posts in this series are at the bottom of the page.
What Should You Do If You Expect a Large Tax Refund, But Haven’t Filed the Bankruptcy Petition Yet?
TIP: Here’s where pre-bankruptcy planning becomes very important. If you expect a large refund, you may want to delay the filing of your bankruptcy petition until you receive the refund and spend it down in an appropriate manner.
Using a large tax refund to pay your rent or mortgage, buy food, make a car payment, or even pay your bankruptcy attorney, are all types of payments that are consistent with filing for bankruptcy in good faith. Sometimes the refund can also be used to buy necessary clothing or furniture, fix your house, repair your car, or get necessary dental work done.
However, you cannot pay existing debts to friends or relatives, give the money away, gamble it away, or buy luxury goods. In general, using it to pay any reasonable and necessary expenses is O.K.
Since pre-bankruptcy planning can be tricky in order to do it in a way that complies with the bankruptcy law, it is always best to seek the advice of a competent bankruptcy attorney before doing so.
Exempting the Tax Refund in the Bankruptcy Petition
If you need to file your bankruptcy petition before you recieve the refund, you must list it in the petition.
To protect your tax refund, you must exempt it by including it as an asset in the Schedule B, which is the Schedule of Personal Property, by stating the anticipated amounts of both the Federal and State refunds, and by listing the exemption and the correct exemption statute (New York C.P.L.R. section 5206) in Schedule C to the petition, which is the Schedule of Exemptions.
If you have to file your bankruptcy petition before preparing your tax return, then you will not know the amount of your refund (which is fairly common because most people don’t do prepare their tax returns until April). In such situations, you should nevertheless list it as “possible income tax refund for the 2009 tax year. . . . Amount $ - unknown -”
You May Be Able to Keep a Non-Exempt Tax Refund If It Is Small
Generally, trustees will only administer non-exempt assets if it is reasonable to do so. If the tax return is relatively small, it will probably be administratively inconvenient for the trustee to be burdened with all of the work necessary to distribute a very small amount.
I previously wrote a post about the issues a Chapter 7 trustee considers in deciding whether to take a debtor’s money or assets to distribute to creditors: Sometimes Debtors Can Keep Non-Exempt Assets in Chapter 7 Bankruptcy Cases .
Quick Links to All Tax Week Blog Posts About Tax Refunds and Bankruptcy:
Informative Article About Eliminating Taxes in Bankruptcy:
Article About Tax Consequences and Bankruptcy:
Written by Craig D. Robins, Esq.
This post is part of a series of articles this week addressing every aspect you will need to know about filing bankruptcy, protecting tax refunds, and related issues. Links to all posts in this series are at the bottom of the page.
Trustees Look Very Closely at Potential Tax Refunds at This Time of Year
The first four months of the year leading up to April 15th is tax season, and trustees will spend extra time and attention looking at the possibility of tax refunds to determine if they should be turned over. They also will continue to do so for a number of weeks thereafter.
Most people will not file their 2009 tax return until after mid-February. Thus, if your meeting of creditors is quickly coming up, you probably have not yet done your tax return. Many trustees will hold your case open until you do file last year’s tax return.
However, if your tax refunds in prior years were relatively small, and it appears that your tax refund for last year will also be small, then the trustee will likely close your case.
On the other hand, if you own your home and are claiming the homestead exemption, then any tax refund you receive will not be protected. In such situations, the Chapter 7 trustee will definitely want to hold your case open to see if you have any significant tax refund.
If you already filed your tax return and it shows that you will be receiving a large tax refund, and if the amount of the refund combined with your other liquid assets greatly exceeds the exemption amount ($2,500 per person), then the trustee will likely direct you to turn over your refund so that he can distribute it to your creditors.
If the trustee wants to keep your case open until you provide him with a copy of the bankruptcy petition, he will probably want your attorney to sign a stipulation which gives the trustee additional time to object to your case if you fail to comply or cooperate.
TIP: It is always best, if you are planning to file for bankruptcy, or if you have recently filed for bankruptcy, to file your tax return as soon as possible. That way, your bankruptcy attorney can review it and determine the best strategy for going forward with your case. In addition, you can minimize the amount of time the trustee will keep your bankruptcy case open for.
Suppose Your Tax Refund is Large and Non-Exempt, But You Filed Your Bankruptcy Petition Last Year
If the trustee appears entitled to the refund because it is not exempt, but you filed the return last year, the trustee should not take the entire refund. In such cases, the trustee is not entitled to any part of the refund that you earned after the date you filed the bankruptcy petition.
The Chapter 7 trustee will thus take a pro-rata portion of the refund based on the percentage of the year that has already passed at the time the petition was filed.
TIP: If you expect a large tax refund, you can minimize the possibility of having to turn this over to a trustee if you revise your withholding exemptions, so that less tax is withheld. Although it may be too late for some consumers to take advantage of this, those who read this post in the future can avail themselves of this tip. Speaking with an accountant about this is always best.
Quick Links to All Tax Week Blog Posts About Tax Refunds and Bankruptcy:
Informative Article About Eliminating Taxes in Bankruptcy:
Article About Tax Consequences and Bankruptcy:
Written by Craig D. Robins, Esq.
This post is part of a series of articles this week addressing every aspect you will need to know about bankruptcy and tax refunds.
The Issues to Consider in Determining If a Tax Refund is Protected in Bankruptcy Are:
1. Are you filing for Chapter 7 or Chapter 13?
2. Are you filing on your own or with your spouse?
3. Did you file your bankruptcy before December 31, or will you be filing in the new year?
4. Did you already get your tax refund?
5. Do you own a home that you are also trying to protect in the bankruptcy?
6. Do you have other liquid assets such as cash and money in the bank?
Tax Refunds in Chapter 7 Cases
Most of this blog post addresses tax refunds that you may receive if you are filing for Chapter 7 Bankruptcy. I will address tax refunds in Chapter 13 cases later in the week.
Do You Have a House?
New York has an unusual exemption scheme as it applies to protecting homes and protecting liquid assets. The way the law works, you can’t protect both. You have to choose: either protect the house with the New York homestead exemption or protect your liquid assets with the various liquid assets exemptions.
If you have a lot of equity in your home, then you will certainly want to use the New York homestead exemption. If you do, then you cannot use the liquid assets exemption, which means that you can’t protect the tax refund.
The New York Liquid Assets Exemption
In New York, each individual consumer who files for bankruptcy relief can protect certain assets: Bankruptcy Exemptions in New York . Each debtor can protect up to $2,500 of liquid assets. This includes:
– Cash
– Money in the Bank
– Entitlement to Tax Refunds
– U.S. Savings Bonds
Thus, if you have a total of $500 in the bank and in cash at the time you file your bankruptcy petition, you can protect the first $2,000 of a tax refund. That means that in close cases you have to look at the value of your liquid assets on the very day you file your petition.
Sometimes a trustee will require that you provide copies of bank account statements that indicate what your balance was on the date your petition was filed.
The $2,500 liquid assets exemption is per person and can be doubled if you are filing with a spouse, for a total of $5,000.
There is no distinction between Federal refunds and state refunds.
What Happens to a Joint Tax Refund If You File Bankruptcy Without Your Spouse?
In the State of New York, each spouse is entitled to one-half of the tax refund for bankruptcy purposes. Last year I wrote a detailed review of the law about this. See Who Owns the Tax Refund in a Bankruptcy Case: Trustee or Spouse? Apportioning the Refund of a Non-filing Spouse .
Here’s how a refund is allocated between debtor and non-filing spouse: Let’s suppose you file for bankruptcy and your spouse does not, and let’s assume that you can protect $2,000 of a tax refund because you have $500 in the bank (remember $2,500 is the total for liquid assets). What happens if the joint tax refund is $7,000?
Since each spouse is entitled to one-half of the refund for bankruptcy purposes, then your share is one-half of 7,000, which is $3,500. You can protect $2,000 of that, which means that you would have to turn over the unprotected part to the trustee, which is $1,500.
TIP: This means that if you expect a large refund, you will want to have as little in your bank account as possible on the date of filing.
Quick Links to All Tax Week Blog Posts About Tax Refunds and Bankruptcy:
Informative Article About Eliminating Taxes in Bankruptcy:
Article About Tax Consequences and Bankruptcy:
Written by Craig D. Robins, Esq.
What Happens to Your Tax Refund If You File for Bankruptcy in New York? Here’s the Complete Guide
Tax refunds can be several thousand dollars; so it’s worth learning how to protect and keep your refund if you file for bankruptcy.
Tax season starts the last month in January — which is when employers and financial institutions send out W-2 forms, 1099 forms, etc. It’s also when consumer tax payers start thinking about and preparing for filing their tax returns.
This week — all week long – I will post a number of helpful and informative articles on everything the consumer needs to know about filing bankruptcy and protecting tax refunds.
If you file for personal bankruptcy in New York, a tax refund that you have not yet received may be totally exempt and protected, or, based on your particular situation, it may only be partially protected, or not protected at all.
To learn whether your refund is protected, carefully read my blog posts this week. If you have questions or comments, please send them in. Keep in mind that the best way to ascertain whether a tax refund is protected in bankruptcy or not, is to seek the advice of an experienced New York bankruptcy attorney.
Quick Links to All Tax Week Blog Posts About Tax Refunds and Bankruptcy:
Informative Article About Eliminating Taxes in Bankruptcy:
Article About Tax Consequences and Bankruptcy:
IRS Federal Tax Liens in Bankruptcy
Posted on
Written by Craig D. Robins, Esq.Last week I wrote about Eliminating Taxes in Bankruptcy . Although you can often eliminate personal liability for old income tax debt, IRS tax liens can still remain attached to assets.
What is a Federal Tax Lien?
When there are substantial tax arrears, the IRS will prepare a document called a Federal Tax Lien and then file it with the county clerk’s office. Doing so then results in the IRS obtaining a secured lien on any asset that the taxpayer may own in that county, whether it is real estate or personal property.
According to the Internal Revenue Service, three things must occur before a federal tax lien is issued: The IRS must assess the liability, send a Notice and Demand for Payment, and you must neglect to pay in full for 10 days after the notice was sent.
Can Federal Tax Liens Be Eliminated in a Personal Bankruptcy Filing?
Unfortunately, even though a debtor can bring a proceeding to discharge old tax income tax debt, this will not remove a federal tax lien.
Thus, you can prevent the IRS from going after you personally by filing for bankruptcy, but if they have a lien on your home, you will have to deal with that if you decide to sell or refinance the home.
Eliminating Taxes in Bankruptcy
Posted on
Written by Craig D. Robins, Esq.Can You Discharge Taxes in Bankruptcy?
Some taxes can be discharged in a personal bankruptcy filing. The most common type of tax that consumers owe is back income taxes. In certain circumstances, they can be discharged. Most other types of taxes cannot be eliminated in bankruptcy.
What Taxes Are Dischargeable In Chapter 7 Bankruptcy?
There is a multi-prong test for determining whether income taxes can be eliminated in a personal bankruptcy filing and this test is rather detailed and complicated.
There is a multi-prong test for determining whether income taxes can be eliminated in a personal bankruptcy filing and this test is rather detailed and complicated.
First Prong: More than three years must have elapsed from the date that the tax return was “last due”. Assuming that no extension request was filed, the income tax is “last due” on April 15th of the following year. It does not matter that you may have filed the tax return a month earlier; the three-year period starts running from the date the return was due — in this case April 15. Extension requests have to be incorporated into the “last due” calculation as well.
Second Prong: The tax return must have been actually filed at least two years prior to the date the bankruptcy petition is filed. Thus, even if more than three years elapsed from the date the return was “last due”, there must be at least two years that elapsed since the date the return was actually filed, before the bankruptcy petition can be filed.
Third Prong: More than 240 days must have elapsed since the date that the IRS “assessed” the tax obligation. Tax assessments are tricky and IRS records and transcripts should be reviewed to determine tax assessment dates.
Other Issues to Consider: The IRS has the right to object to efforts to discharge tax debts if they feel that the taxpayer filed fraudulent returns, willfully attempted to evade taxes, or engaged in a pattern of tax evasion. Also note that even if you can eliminate federal tax obligations that you ow to the Internal Revenue Service, they may still have a lien on your assets if the IRS obtained a federal tax lien. I will address this issue in a future post.
How Do You Eliminate Taxes in a Bankruptcy Proceeding?
It is generally necessary to obtain a determination from the bankruptcy court. This, unfortunately, can be more involved than the bankruptcy itself, as it often entails actually suing the IRS in an “adversary proceeding”, which is a federal lawsuit brought within the bankruptcy case, and heard before the bankruptcy court judge. However, since tax debt is often substantial, it is usually worth the investment. For more information on adversary proceedings, see A Primer on Adversary Proceedings .
What about Discharging New York State Taxes?
The same bankruptcy rules that apply to the IRS also apply to state tax obligations.
What Taxes Cannot Be Eliminated in Bankruptcy Filings?
Most other types of taxes cannot be discharged in a bankruptcy proceeding. These include withholding taxes, fiduciary taxes, excise taxes, and sales taxes. Remember, income taxes, in general, that are less than three years old, cannot be eliminated in bankruptcy.
Discharging taxes in bankruptcy can be rather complicated. Getting advice from an experienced bankruptcy attorney who has actually brought tax dischargeability proceedings is important if you have significant tax obligations.
Written by Craig D. Robins, Esq.Almost all pensions are protected in bankruptcy proceedings, whether the debtor files here in New York or in any other state
Here’s why: In a 1992 United States Supreme Court case, the court ruled that any pension plan that is “ERISA qualified” is excluded from the bankruptcy estate.
“ERISA” is the Federal Employee Retirement Income Security Act of 1974. Under this act, pension plans, 401-K plans, and other “ERISA-qualified plans” are specifically protected from creditors because of a prohibition from being assigned or alienated.
This means that the pension never even becomes part of the bankruptcy estate. (The bankruptcy estate consists of those assets owned by the debtor which the trustee can go after if the assets are not exempt). When an asset like a pension plan is excluded from the bankruptcy estate, it remains the property of the debtor and the trustee cannot touch it.
Also, since pension plans are not part of the bankruptcy estate, you don’t even have to ascertain whether there is an exemption statute to protect it. It is already protected.
So, simply put, an ERISA-qualified plan cannot be used to satisfy the claims of creditors in a bankruptcy proceeding and should therefore be totally protected.
How can you tell if a pension plan is ERISA-qualified?
Pension plans usually have a pamphlet of information about the plan which contains information about the plan’s tax status. Most employers give a copy of the pamphlet at some point, but if misplaced, additional copies can usually be obtained easily.
The best assurance that a plan is ERISA-qualified is when the plan contains a copy of a favorable ruling letter from the IRS indicating that the IRS has determined that the pension plan is in compliance with the tax code and meets tax qualification requirements. Incidentally, a plan could conceivably be considered tax-qualified even if it has not received a favorable ruling letter from the IRS, and even if it is not in compliance with the tax code, as long as the debtor is not materially responsible for its noncompliance.
One important note: Although the pension plan may be protected, recent contributions, if very large, may not be.
Of course, making sure a pension or retirement account is ERISA-qualified and protected is extremely important. This is one of the many things an experienced bankruptcy attorney should do, and we do this regularly with our Long Island bankruptcy clients.