The Tax Assessment Was At Least 240 Days Old
Again, this often covers the same ground as the first two rules. The IRS must assess the tax at least 240 days before the taxpayer files for bankruptcy. The IRS assessment can arise from a self-reported balance due , an IRS final determination in an audit, or an IRS proposed assessment that has become final.
In other words, you reported what you owed, or the IRS has officially stated, “This is what you owe.”
Planning For Chapter 7
Here are some ways to increase your chances of keeping your tax refund in Chapter 7 bankruptcy.
If you file during tax season. Individuals who file bankruptcy during tax season often have to figure out what to do with the tax refund they have just received. You can use any available tax refund or wildcard exemption to protect it. But if your state doesn’t offer these exemptions, or you want to save your wildcard for other assets, consider these strategies:
- If possible, file for bankruptcy after receiving and spending your tax refund. If you choose to do this, be sure to use your refund on necessities and not to purchase new assets.
- Use your tax refund to pay your bankruptcy attorney for the fees and costs of your case.
These strategies have been found to pass muster in most bankruptcy cases because you’re allowed to use your assets to pay expected living expenses. Neither option involves an attempt to avoid paying a creditor, which is considered fraudulent in bankruptcy.
Adjust withholdings. If you expect a significant return because of amounts deducted from your paycheck, the fix is to adjust your tax withholding early in the year. Keep in mind that this tip won’t be as helpful if you change your withholding later in the year such as from October through December.
I Intend To File For Bankruptcy Sometime Later This Year
As in the first example, any refund amount would be deemed as part of your estate under this scenario. However, you can avoid losing the money by, instead, adjusting the amount of money deducted from your paycheck for income taxes so that youll only be covering the actual tax youll eventually owe. This way youll increase the amount of money you have to spend each paycheck.
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How Can Chapter 7 Interfere With Your Tax Refund
According to the Internal Revenue Service, there are different reasons why some people do not receive their tax refunds during bankruptcy. For example, the IRS takes some refunds to pay off tax-related debt and in some instances, payment delays have nothing to do with bankruptcy. Moreover, some tax refunds are not delivered due to a turnover request by a Chapter 7 trustee.
Amending Your Petition To List A Tax Refund
Tax refunds are valuable assets in your bankruptcy that must be listed on your bankruptcy forms. If you forgot to list your tax refund on your bankruptcy forms and your 341 meeting has not yet taken place, you must file an amendment to your bankruptcy forms listing the refund, whether or not it is exempt.
If your 341 meeting has already occurred and the trustee has determined your case is a no-asset case chances are an amendment adding your tax refund is not necessary because it would have otherwise been protected by an exemption. You can check your state exemptions to confirm. In some cases a trustee may indicate that they will check back after your tax return has been filed to to see if you receive a tax refund.
If you receive a notice asking your creditors to file a proof of claim or your trustee states your tax refund will be seized, you can file an amendment to protect what you can using available exemptions.
The amount that can be protected by an exemption may depend on whether other assets are being protected with the wildcard exemption and/or whether your state has specific exemptions for one or more tax credits.
If youâre an Upsolve user and need instructions on how to use our free web app to prepare your amendment, please visit help.upsolve.org and use the “Submit a Request” feature in the top right corner to send us a message.
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Tax Refunds In Chapter 13 Bankruptcy
When you initially file for Chapter 13, you’ll need to protect your tax refund with an exemption to keep it, or use it for necessary expenses before filing, as discussed above. If you can’t, you’ll pay it to your creditors.
During your three- to five-year repayment plan, it works a bit differently. You’re required to contribute all disposable income to your Chapter 13 plan. If your plan pays less than 100% to creditors, the trustee can keep your tax refund. It won’t reduce your plan payment, however. Your creditors will receive the percentage of your total disposable income, which will include your tax return, that they’re entitled to under your plan.
Including Funds In An Exemption
This is typically your worst-case scenario. In any bankruptcy, the debtor can keep a court-determined amount of money or assets, known as exemptions. If your refund is sizeable and you receive it shortly before filing or it is based on money that was earned prior to your filing, you may be able to include it in this exempt amount. The total amount youll be allowed to exempt from your eligible assets will generally depend on which state you file your bankruptcy in.
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Some Practical Tax Refund Issues
Adverse possession and mootness are formal rules which often control this process. There are a number of informal rules as well. These rules vary significantly in different jurisdictions. Once again, the bottom line is that an Athens bankruptcy lawyer can use these rules to protect your tax refund.
This informal rule is rather straightforward. In most cases, if the tax refund is less than about $2,000, the trustee does not bother with a motion for turnover. Individual creditors receive almost nothing once the refund is divided among them.
If the tax refund is over $2,000, the trustee might consider filing a motion for turnover. However, because of the mootness and adverse possession doctrines, this motion might or might not succeed. As a result, a Georgia bankruptcy lawyer can often convince a trustee to not file such a motion or at least allow the debtor to keep most of the return.
Alternatively, an attorney can often engineer an out-of-court settlement. For example, the debtor could give up a large tax refund if the trustee applies it to a debt consolidation payment or two. Once again, these deals are easier to arrange if a defense arguably applies.
A strategic approach could avoid these problems altogether. Many people intentionally over-withhold so they get large refunds in the spring. Adjusting ones withholding could lower the amount of an anticipated return. That way, a Georgia bankruptcy lawyer does not have to go to court over a tax refund.
How Bankruptcy Can Affect A Tax Return
Receiving an income tax return can feel great and help you get caught up on debts youve fallen behind on. Despite having the option of breaking even and not paying as much in payroll taxes throughout the year, some people enjoy receiving a refund check.
Unfortunately, the joy of anticipating a refund can turn to horror quickly if a debt collector attaches your refund and you get less than what you anticipated. Tax refunds can be garnished by private creditors, the IRS, and other government entities.
What do you need to know about the attachment of your tax refund?
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Chapter 13 Tax Filing Requirements
Chapter 13 is the most common type of bankruptcy filed in the Eastern District of North Carolina. Only individuals may seek Chapter 13 bankruptcy protection. A chapter 13 bankruptcy allows individuals with regular income to develop a repayment plan to pay all or part of their debts over a period of three to five years. If you successfully complete your repayment plan, you will receive a discharge of debt.
To qualify for a Chapter 13 reorganization of debt, you must have regular income and have filed all required tax returns for the tax periods ending within four years of the bankruptcy filing.
When you file a Chapter 13 petition to reorganize your debt, the bankruptcy estate is not treated as a separate entity for tax purposes. You continue to file the same Form 1040 individual income tax returns that were used before the bankruptcy.
When filing your tax return, you report all income received during the year and deduct any permitted expenses. You do not list as income the amount of forgiven debt due to the Chapter 13 bankruptcy.
Some taxes may be dischargeable under Chapter 13. Whether federal tax debt may be discharged must be determined on a case by case basis. You will need to consult with a bankruptcy attorney to evaluate which tax debts may be discharged in your particular case. If federal tax debt is the reason you are seeking Chapter 13 protection, you may need to increase your withholding or quarterly estimated tax payments.
Retaining Your Refund Through Exemptions
There are numerous exemptions that entitle you to keep certain assets out of the bankruptcy estate, which means they cannot be used to pay off your creditors. Basic exemptions include your bedding, clothing, kitchen appliances, and other household goods. Others allow you to keep insurance benefits and pensions.
Some of the federal or Ohio exemptions may apply to all or a part of your tax refund, enabling you to keep a certain amount for yourself. These exemptions can depend on the jurisdiction in which you are filing for bankruptcy, so be sure to speak to an experienced Cleveland bankruptcy lawyer to learn more about exemptions that may impact your tax refund. For example, Ohio allows what is known as a wild card exemption for up to $400 of any property.
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Can I Keep My Tax Refund
It depends on your circumstances. You must inform your trustee when you receive your tax refund. You also need to provide a copy of your ATO Notice of Assessment. It’s important to not spend your tax refund until your trustee makes an assessment and informs you if they have a claim in the refund. Your trustee calculates the following and notifies you of the outcome:
- Refunds for income you earn before you enter bankruptcy are assets your trustee can claim.
- Refunds for income you earn after you enter bankruptcy form part of your assessable income for compulsory payments. If your assessable income exceeds a set amount you may need to make compulsory payments. For more information about compulsory payments during bankruptcy see Income and employment.
You still need to lodge your tax returns as your obligations to the ATO remain during bankruptcy.
Filing Taxes After Filing For Bankruptcy
Filing an income tax return after filing for bankruptcy does not have to be a problem, as long as you know what to watch out for, including when and how to file.
For information on the third coronavirus relief package, please visit our American Rescue Plan: What Does it Mean for You and a Third Stimulus Check blog post.
Is there life after bankruptcy? Absolutely, and it includes taxes. Filing an income tax return after filing for bankruptcy does not have to be a problem, as long as you know what to watch out for, including when and how to file.
People that file bankruptcy have to make sure that there are a few things taken care of when it comes to filing their taxes, said Joshua S. Barger, vice president of tax services at Foundation Financial Group in Jacksonville, Florida.
According to IRS Publication 908, Bankruptcy Tax Guide, the Bankruptcy Code requires a debtor to file an individual tax return, or request an extension. If this does not happen, the bankruptcy case can be converted or dismissed. In addition, the bankruptcy trustee is required to file a tax return for estates and trust, Form 1041, for the bankruptcy estate.
No matter what time of year it is, the filing deadline can seem too close for comfort — especially if you are filing or considering filing for bankruptcy. With a little planning and preparation, you will at least know what to do to minimize your stress.
– Joshua S. Barger, vice president of tax services, Foundation Financial Group
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Learn More About Your Stimulus Check And Bankruptcy
If you are considering bankruptcy, you probably have a ton of questions about what to expect. You may be concerned if you received federal stimulus money in the last 12 months and/or are expecting a tax refund in a few weeks.
At Nguyen Law Group, were here to provide the legal support you need for any bankruptcy-related matter. Our advice and services have helped many clients resolve their problems with debt and take a step toward achieving financial independence again. If you would like to learn more about what we can do for you, schedule a consultation with our attorney.
How Does Chapter 13 Bankruptcy Affect Your Tax Return In Texas
Theres an old adage that nothing is certain except death and taxes. Even though you may be able to address some tax debt with a bankruptcy filing, you still must file a federal tax return with the IRS. Chapter 13 bankruptcy lets individuals and small business owners develop a plan to reorganize their debt and repay their creditors.
Before you can file for Chapter 13 bankruptcy, you must have filed all required tax returns for the previous four years before the meeting of creditors is scheduled. In addition, you must file all current applicable federal, state and local taxes that are due during and after the bankruptcy process. Failure to file returns or pay current taxes during your bankruptcy may result in your case being dismissed. The IRS website can provide assistance in documenting and verifying that you have filed the appropriate forms.
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The Automatic Stay Stops Irs Collection Of Tax Debts During Your Bankruptcy But The Irs May Be Able To Collect From You Later
By Hari Ender, Attorney
The automatic stay will stop the IRS from collecting taxes debt that you owe once you file a Chapter 7 or Chapter 13 bankruptcy. But depending upon the nature of the tax debt you owe, the IRS may be permitted to collect from you later. Continue reading for more information about the automatic stay in bankruptcy and what it can do to help you with your tax debt.
Do You Have To File A Tax Return When Going Through Bankruptcy
While you can sometimes deal with past tax debt through a bankruptcy filing, you wont be protected from all past, current or future tax liability or obligations to the IRS.
- Chapter 13 filers are required to file returns for tax periods ending within four years of the bankruptcy filing before you have a meeting with creditors to work out your debt repayment plan.
- In Chapter 7 and Chapter 11, the bankruptcy estate that takes ownership of your assets is also required to file a separate tax return. The return must be filed by the trustee appointed to manage assets but sometimes in Chapter 11, the bankruptcy filer acts as the trustee and thus must take on this obligation.
And, no matter what chapter of bankruptcy you file under, all tax returns due after you file must be submitted on time unless you file for an extension. Failing to file or request an extension can result in dismissal of your bankruptcy proceedings or conversion of your bankruptcy to a different type.
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How Does Filing For Chapter 7 Bankruptcy Affect My Tax Return
Aside from the questionIf I file for Chapter 7 bankruptcy, and then win a lottery, can I keep the money?the second most asked question is: Can I keep my tax refund under the same circumstance? Its a good and valid, question and one that depends upon certain conditions pertaining to the timing of the actual filing of bankruptcy.
Surprisingly, it is both permissible and legal to factor the question of the status of your tax refund into consideration when filing for bankruptcy. Well go over the various conditions related to timing, however, it might be a good idea to first gain an understanding of how the Chapter 7 bankruptcy process works.
Chapter 7 Bankruptcys Effect On Tax Refunds Is All About Timing
If you are considering filing a Chapter 7 bankruptcy around tax time, it is a good idea to talk to both a bankruptcy attorney and an accountant before heading to the courthouse. A Chapter 7 bankruptcy can affect your tax refund and even cause you to lose it entirely, but that effect will depend on the timing of when you receive your tax refund and when you file your bankruptcy petition.
A Chapter 7 bankruptcy works as a snapshot picture of your financial circumstances on the day the petition is filed. At that moment, everything you have, from homes to bank accounts, becomes part of your bankruptcy estate. You and your bankruptcy attorney can carve out several exemptions, including your home up to a certain value, the family car, and a certain value of personal property items. Then everything else is sold and the proceeds are used to pay off your creditors.
Your tax refund can count as part of your bankruptcy estate depending on when you earn the money that goes into the tax refund and when you receive it compared to the date you file for bankruptcy:
Because your Chapter 7 bankruptcy affects your tax refund you will want to discuss the timing of your filing both the tax return and the bankruptcy petition so you can avoid giving the bankruptcy more of your money to pay off your creditors.
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