Reducing tax refund on purpose

[msm859]

Sure that's the ideal situation msm, but -- sometimes people *need* the chunk of money, rather than getting say an extra amount each pay check.

Even if that was true, then part of the pre-bankruptcy planning should be to adjust your W-4 so you don't get a refund (or so the Trustee does not get your refund) If, when your BK is done you could always readjust it - or hopefully learn from your experience and begin budgeting and saving.

[tcreegan]

Sometimes, bankruptcy is not about doing the "right" thing, it is a game. ........ None of those are illegal and I propose that none of those are immoral either .....whoa, easy now....Bk is a business decision, nothing personal....BK court doesn't handle immoral acts...well, maybe if Jerry Springer declared BK...

My thought was to put a couple hundred to next years tax so the refund flys under the trustees 1K ceiling. But a couple hundred on line 75...thats pretty visible...

Oh well, whatever happens let us know?

Tom in Colo

[BROKEDED]

Well, you haven't really said what type of less than optimal changes you're talking about. Are you talking medical expenses, charity, employment related? I mean, if your friend generally donates $1000 worth of stuff to goodwill and then only shows $100 then that may raise an eyebrow. But if they donated $500, the reduction could be explained by the fact that they are in BK.

I personally see no problem with it if 75% is at stake and it's just a matter of not claiming all your miscellaneous deductions. I know I've left a lot of money on the table over the year when filing taxes. No ones ever felt compelled to call me and double check my numbers to make sure I got all my money. If it were only the $179 they'd lose, then I'd be inclined to let those crumbs go. I definitely wouldn't amend later. No need to have to keep looking over your shoulder.

[TexasCat]

While not an attorney, that just doesn't seem like it is going to fly in this case. By applying to next years taxes you are effectively taking possession of the $ (at least logically). I don't see a trustee letting you do that. Heck everyone would do that if permissible to avoid having the trustee take it.

I couldn't find that anyone else has posted about this...
A trustee took this very issue through the court system all the way to the Supreme
Court. The courts decided that a tax refund can be applied to next years taxes - the trustee can only take what's left over (if anything) - and that the debtor is *not* taking possession of the refund (see below).

I'm not a lawyer. This is not legal advice.

Weinman v. Graves, 609 F.3d 1153 (10th Cir. 2010)
June 29, 2010
A married couple filed their 2006 tax return with a $3,000 refund,
but instead of taking the refund, they elected to have the entire
amount applied to any future tax liability. The trustee turned to
the IRS and basically said to hand it over. The IRS said no. The
bankruptcy court ruled against the trustee, who appealed to the
Bankruptcy Appellate Panel. They upheld the ruling. The trustee
appealed to the Tenth Circuit Court of Appeals. They upheld the
ruling. The trustee appealed to the United States Supreme Court,
which basically said to go away (Petition Denied).
(Note: a www may need to go in front of the supremecourt.gov link)
supremecourt.gov/Search.aspx?FileName=/docketfiles/10-401.htm

caselaw.findlaw.com/us-10th-circuit/1529709.html

In summary, we hold that the pre-petition portion of the refund is property of the estate. We go further, however, to hold that only the part of the refund that (1) is attributable to pre-petition earnings and (2) reverted to debtors after application of the refund to their ultimate (2007) tax liability, is subject to turnover.

[from the footnotes]

2. Debtors presumably controlled the refund before they made their election to apply it to future taxes, but that control was pre-petition and thus not “during the case” as required by § 542(a).

3. The fact that debtors had never been in possession of the refund or the prepayment during the case makes it unnecessary for us to engage in the debate about whether § 542(a) requires them to turn over the “value” of the refund, given the statutory language requiring a turnover target to deliver to the trustee “property or the value of such property.

Again - I am not a lawyer.

[HHM]

Be careful, that case had to do with whether the trustee could force the IRS to turn over the refund. And the answer is no, the IRS is not required to turnover the funds. That is a very narrow issue.

The trustee CAN still go after the debtor's to pay the amount as an avoidable transfer. The footnotes are beneficial in this regard, but the issue is untested.

I am not a fan of the strategy, to really work, you have to start planning almost a year in advance. Trying to do it last minute never really works out mathematically and typically results in the case staying OPEN much longer while the trustee waits to see what will be owed. This is why trustees wait until Sept/Oct before requesting tax refunds, by that point, any adjustment on the w-4 will not have a significant effect on the eventual refund. Also, it is a rare set of circumstances that trying to do this would really matter, you need to owe tax for the year and for most BK filers, even if they had 9 exemptions claimed, would still not owe tax, so the issue is moot for 90% of those filing bankruptcy.

This is not a strategy for keeping a tax refund, it is a strategy for paying an anticipated, or known post petition tax liability. But it begs the questions, how would you really know you are going to owe. I am hard pressed to think of a scenario where this plan would matter.

[ValleYum]

@HHM: Wasn't this ruling also due to the fact that these debtors, in a pre-petition move, elected to apply their tax overpayment to their future tax liability and because this election is irrevocable and the debtors had never had actual control of these funds, that the Trustee in turn once the petition was filed has the same restrictions as the debtors and can't claw the overpayment to the IRS back?

(Holy run-on question Batman! LOL I'm sorry I hope it makes sense...)