Reducing tax refund on purpose

[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...)

[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.

[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.

[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.

[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

[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.

[NewPage]

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.

[msm859]

Actually what I don't understand is why people are not adjusting their W-4's so that less money is withheld so that they get a smaller refund. Ideally, your W-4's should be set so you do not owe anything AND you get zero refund. This would then become a non-issue.

[discouraged]

And what makes your friend think the trustee isn't smart enough to look at the other year's and wonder if something fishy is going on. I really don't understand why people aren't thinking like desdemona. Put this into prespective - how much debt did your friend get rid of? I'm sure it had to be well over 1,300. Why would anyone take the chance of losing what they gained for a few thousand dollars?

There have been some high profile bk frauds in the news (look at the current one in the news section). Who would even want to go there?

[tobee43]

it depends on when you file......hhm has a great post about it...it usually starts in oct. when the trustees really take notice with respect to taking one's take refund...

now...that being said....we filed a time AFTER taxes BUT before we rec'd our return.......our atty advised us to spent the money immediately.......if not sooner....so i thinnk it depends on a few things...first we were a no asset..both unemployed...homeless after losing our house after 30 years...losing our car...losing our everything...selling every thing we had to eat...kinda bk....and we were NEVER questioned by the trustee about the money we rec'd nor how it was spend...and it was over 10k.....AND by the time we sat in front of our trustee....that money was long gone.

and PP was correct it's a chess game to be played carefully...and most importantly HONESTLY...and truthfully...and you can apply them to next year...and it will send up a "flag" one just doesn't need when ones plate is that full....just food for thought.

[daylate]

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.

[NewPage]

Yes it could. However, rather than lose the over-payment, and then also do an amended tax report after discharge which could be considered fraud, you can put your taxes towards the next years tax liability. I would certainly address the lawyer for this situation in any case. 'Hub

Hold the phone; I thought that could not happen?? Or is it a matter of your location? Because I'm sure I was told here that I could not elect to do that....which is why we are paying a bunch of things with our refund before my filing!

[DesdemonaB]

It's not just $179 that the trustee will take. If the refund is over $1000, the trustee takes 75% of it (because he filed in October) plus the $380 that was already paid for other assets. If the refund is under $1000, the trustee abandons everything.

Sometimes, bankruptcy is not about doing the "right" thing, it is a game. How many people out there pre plan and adjusting their withholding or reduce their income for 6 months to get under the means or pay $500 debts to their relatives just prior to filing or buy a stock pile of exempt items to reduce their cash (this list can go on and on)? None of those are illegal and I propose that none of those are immoral either, they are simply working within the constraints of the law.

Yes Joe you are correct, BKing can be a game. BUT what your friend is missing is the big picture here, they had to pay 380.00 and right now as it stands they might have a refund of 1179.00 in which they believe the UST will claim 75% of. So if I do my math that’s 380 + 1179X.75=884.25 for a total of 1,264.25 due in exchange for a (fill in the blank) discharge.
My personal response to your post was only to say, come on you are asking people who are losing homes, cars, family possessions, and much larger tax refunds to help you friend “cheat” the system just so they get to keep their refund. ME I filed, and like I said I have no problem walking my refund right to my UST and give her a big fat THANK YOU.

[JoeBankrupt33]

It's not just $179 that the trustee will take. If the refund is over $1000, the trustee takes 75% of it (because he filed in October) plus the $380 that was already paid for other assets. If the refund is under $1000, the trustee abandons everything.

Sometimes, bankruptcy is not about doing the "right" thing, it is a game. How many people out there pre plan and adjusting their withholding or reduce their income for 6 months to get under the means or pay $500 debts to their relatives just prior to filing or buy a stock pile of exempt items to reduce their cash (this list can go on and on)? None of those are illegal and I propose that none of those are immoral either, they are simply working within the constraints of the law.

[tobee43]

i agree with daylate.....and while the irs may not care...(and they don't)...actually....if they always owe you..( and i do not suggest anyone does this), but if THEY the irs always owe YOU...they can even care less if you file late....of course if you owe them, that's another story.

i would never think of excluding the deductions if they resulted in a small refund to hide from the trustee...it really could back fire and why?? it's not like it's a million bucks....shoot....i would a few thousand just to get my bk done...which i did...whether in the form of a tax refund or paying an atty....do the "right" thing.