Checking the client’s prior tax return and grilling the client allowed my partner to find and exempt a $20,000 tax refund likely to arrive post petition, despite the fact the client never mentioned it.
The client hadn’t listed the expected tax refund in his questionnaire, but admitted, when asked, that he usually got a substantial tax refund. ( I guess so, when the refund exceeded $20K.) If we had relied on the client’s memory or understanding and had only collected, but not read the prior tax return, we could have missed it. And then we’d face the question of whether we could exempt an asset that had not been scheduled.
In a perfect world, clients would not lend the government substantial sums of money interest free. Those tax refunds are vulnerable to IRS offsets and interception for child support. Refunds are also easy pickings for the trustees since they are cash equivalents and incur no costs to administer.
When deciding what assets to exempt, I want to exempt the cash equivalents, and leave unprotected the tangible stuff, the older car, the timeshare, the Hummel collection, with the thought that the trustee encounters real issues of valuation and liquidation for such things. The trustee may decide that the return is too small or speculative to be worth the effort.
In our case, the client came to us, and the case was filed, late in the year. Had he come in May rather than November, I would have suggested that he radically reduce his withholding for the balance of the year so that there was no refund come years end. While the trustee may have a claim to a fraction of the refund corresponding to the portion of the tax year that has run prepetition, I know of no duty on the part of the debtor to keep overwithholding, post filing, so as to create a refund.
Image courtesy of the_junes.
That is a very large refund. I have made it a practice to review tax refund issues with my clients. I find that many of them are missing out on about $300-$500 a month in their budgets. The results can often shift a client’s thinking regarding the feasibility of a Ch. 13. Many will balk when I tell them the likely monthly amount due under the Plan to the trustee. Then I show them the tax refund issues they have, and explain that if that problem is corrected they won’t notice the Plan payment. Renders a lot of hesitancy toward a 13 moot.
Good thoughts. Also, if you correct the taxes on the means test form for
the refund, they may have no choice but to be in 13
>Had he come in May rather than November, I would have suggested that he
radically reduce his withholding for the balance of the year so that
there was no refund come years end.<
If he had come in May and filed quickly, would there be any (bankruptcy) reason to reduce his withholding since the bankruptcy estate only gets the refund earned pre-petition?
I think the estate may claim a fraction of the refund, based on the number
of months out of 12 that preceded the filing. So if reduced withholding
eliminates the refund, then the estate gets a fraction of nothing.
I have never seen nor heard of a situation where the trustee looked at the date of
each contribution to calculate what the estate is due.
Cathy